FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
COMPANY INFORMATION
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PIRATE STUDIOS LIMITED
CONTENTS
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT
FOR THE YEAR ENDED 31 DECEMBER 2022
The directors present their strategic report and financial statements for the year ended 31 December 2022.
The principal activity of Pirate Studios Limited (the "company") and its subsidiaries (together "the group") was that of provision of music studios and facilities.
The company is a trading company and acts as a holding company for the group’s trading subsidiaries, Pirate Studio LLC and Pirate Studio GmbH, incorporated in USA and Germany respectively. The company's results also include the results of its foreign branch registered in Ireland.
The company is the world’s first and only global self-service studio provider, established in July 2015 with 36 locations worldwide (2021 - 36 locations worldwide).
The company has developed a powerful and highly disruptive customer proposition that is differentiated from traditional studios and appeals to a broad range of consumers. Our aim is to empower artists by providing state- of-the-art creative studios to rent hourly, at an affordable price. The key elements of our proposition include:
∙An innovative studio design allowing for cost-effective and efficient assembly, reducing time to market.
∙Non-prime location rents and reduced staffing which are passed to customers in the form of low prices.
∙Unique self-service operating model, facilitating unmanned buildings which are open 24/7 compared to competitors who are open 12 hours a day.
∙Proprietary technology allowing artists to capture and share their performances direct from the studio.
The company's strategy is to continue to roll out new studios with high returns on capital whilst continuing to develop its product offering.
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
This section describes how we have considered and had regard to the interests of our key stakeholders when exercising our duty to promote the success of the company under section 172(1) of the Companies Act 2006. The principles set out within this section are not just something considered at board level but are in fact embedded throughout the company.
Our key stakeholder groups are set out below. All of these groups are key to the continued success of our business and their views and needs, as well as any long term consequences of our actions, are taken into account when making any decision at any level throughout out the business. Sometimes decisions must be made based on competing priorities. Investors - we rely on investors and providers of debt funding as essential sources of capital for our global expansion plan and digital product development. They rely on us to manage cash prudently and generate a return on their investment by striking a balance between ambitious growth and sustainability. Suppliers - we rely on our suppliers to provide the real estate through which we operate, supply the materials and labour required to build new studios and provide essential services we need to operate our business. Our suppliers rely on us to generate revenue and employment for them. Customers - our customers are the reason we exist and we are passionate about not just providing safe, accessible and comfortable spaces for them to create but also the tools and opportunities for them to realise their true potential. Connecting customers with each other as well as their audience and the wider market remains a key part of our mission. In doing so, we build our brand value and loyalty. Our workforce - our ambitious plans would not be possible without the hard work and dedication of our employees. Our employees rely on us to provide a safe and respectful working environment, stable employment and the training and opportunities to further develop their skillsets. Communities and the environment - we engage with local communities, local government and the police to ensure that we act both as a responsible company and a responsible neighbour. Our business and the customers that use our studios have the potential to enrich local communities but it has to be done in a way that is acceptable to those existing communities the safety of our customers as well as the surrounding community is our highest priority. At a wider level we are always looking at new ways we can reduce any adverse impact of our business on the environment.
Revenue increased from £7,230,712 in 2021 to £10,292,517 in 2022 representing an increase of 42%, this is due to the easing of COVID-19 restrictions as well as the underlying growth in demand. An analysis of revenue is set out in Note 4.
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
Free credit is given for the first month after a go live of a new location. This marketing exercise is a very effective way of generate hype and acquiring new customers. Credit is also offered through other marketing promotions such as our “refer a friend” scheme. The directors monitor credit and the analysis below shows the year on year growth in credit revenue, driving total bookings and therefore total revenue as new studios launched during 2020 continue to grow. The use of credit bookings as an effective way to generate revenue can be seen by the growth in revenue year on year, and reduction in the credit bookings as a proportion of total sales.
Given the backdrop of the global pandemic, and the cost of living crisis that followed, the directors were satisfied with the performance of the business against these KPIs and consider the business to be well on track to becoming a self-sustaining business.
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
Attracting and retaining customers
As the majority of our revenue is derived from our studios operations, our success is dependent on attracting and retaining customers within our studios. Consequently, we must continually engage existing customers and attract new customers in order to maintain or increase our studio occupancy levels. If we are unable to attract and retain customers, it could have a material adverse effect on our rate of growth, business and prospects. The factors that may influence this include:
∙Competition from other studio operators
∙Changes in customer preference away from our self-service value offering
∙A decline in general interest to our product offering
∙Changes in customer spending habits due to adverse economic conditions
∙Changes in the level of positive referrals from current and former customers
∙Enforced closures as a result of pandemics
New site availability A key part of our expansion strategy is the opening of new studios. Currently all of our sites are leaseholds and we are dependent upon finding and securing new leasehold sites where we can open new studios. Our site selection strategy includes a variety of criteria to determine the optimal locations of new sites such as demographics, population density, accessibility, competition and other music-led demand indicators. Our ability to identify and negotiate acceptable lease terms for new sites may be adversely affected by the availability of sites that meet our selection criteria or fluctuations in the property market. As a result, we may be unable to identify suitable sites and secure them acceptable terms or in a timely manner. This could have a material adverse effect on our rate of growth, business and prospects. Moving to a business model that is able to also fund freehold opportunities reduces this risk as it widens the pool of locations available as well as enabling the company to share the economic benefits of property ownership and this is something the company is currently looking at. Supply chain management We rely on third-party contractors and suppliers for various services and products, such as site fit out, equipment, maintenance and cleaning. Whilst there are a number of providers for each of these services and we closely monitor their performance, there are risks that are beyond our control. If we encounter delays or difficulties in securing the products or services provided by our third-party contractors and suppliers or there is a deficiency, lack of or poor quality of such products or services provided, it may impact our service offering and have a material adverse effect on our rate of growth, business and prospects. Systems We are a technology enabled company and any disruptions or failures that affect our website, studio access, marketing, finance and other administrative functions could have an adverse effect on our operations. While we have a full business continuity plan in place, conduct regular data back-ups and have processes in place to protect customer data, disruptions, failures or cyber attacks involving our information technology systems could have a material adverse effect on our rate of growth, business and prospects. New business lines Our strategy is to develop a number of digital products and services which are complementary to our studios. This requires additional capital investment as well as management time and other resources. It is possible any such products or services may not perform in line with expectations, which could have a material adverse effect on our rate of growth, business and prospects. Access to capital During the ramp-up phase, our business will be capital intensive, and we require significant capital to finance
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
such activities, as well as to fund ongoing investments in our business and to meet our debt obligations. Any inability or delay in raising additional capital if and when required may affect our ability to execute on our growth strategy or cause us to lose future opportunities. This could have a material adverse effect on our rate of growth, business and prospects.
Brexit The direct impact of Brexit on the company is considered to be negligible. Our business model doesn’t rely on importing or exporting goods or providing services across borders so any supply chain issues that Brexit may have caused or increased duty costs or VAT considerations do not pose a threat. Whenever we are building new studios in the EU, our local subsidiary will work with local contractors also based within the EU and the project is paid for in EUR. Once operational both the revenue and costs generated by that location are also in Euros so the foreign exchange risk is negligible. We’re also still able to attract a diverse workforce. Cost of living and inflation As is the case with most other UK businesses we have experienced higher costs since Brexit, the pandemic and the war in Ukraine. This was particularly pronounced throughout 2022 driven by unusually high inflation and increased fuel costs in the UK. We have had to mitigate this risk by increasing our prices at the end of 2021 and the end of 2022. It is likely this will now become an annual pricing review.
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PIRATE STUDIOS LIMITED
GROUP STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
The Group and Company recovered quickly from the COVID-19 pandemic and whilst there are still some knock on effects of the pandemic and other factors like the war in Ukraine resulting in a cost of living crisis we have seen the underlying business continue to improve from both a revenue and profitability point of view throughout 2022 and 2023.
Management has run various forecast scenarios for a period of at least 24 months from the date of signing of these financial statements to determine the impact on profitability and cashflow in the event of depressed revenue. In each scenario, the group’s current portfolio and cost base, including the servicing of operating lease commitments that are held off balance sheet (note 27 to the financial statements), produces a sustainable, cash-generative business and, as a result, the financial statements are prepared on a going concern basis. The Directors recognise the importance of the leased property portfolio to the functioning of the business model, therefore regularly review the performance of each location which helps to inform future decisions related to the properties they operate in. The minimum cash requirement for the next 24 months is $4m. However, under the worst case scenarios $6m of capital would be required in 2024 and a further $2m would then be needed in 2025 which would mean having to draw down the full $15m of the initial investment being sought as part of the current fundraising round detailed below, alongside a further $1m of the second tranche. This is the worst case scenario considered by management from a cash burn point of view but it does include some growth and revenue driving initiatives. As it only requires $1m of the second tranche of $15m, management also consider this to be ample headroom on cash. The directors have a successful history of raising financing from similar transactions, having raised additional equity and debt from both existing and new investors in each of the previous years. Notably, since the end of 2021, the group has raised over £12m in additional capital as well as negotiating the framework of a debt restructure agreement as part of it’s current funding round. The current fundraising round is for an initial investment of $15m (of which $8m has been received to date in the form of promissory notes) followed by another $15m expected within the next 12-24 months to fund growth. The lead investor also has the option to invest a further $25m. This initial funding is now expected to close by the end of Q1 2024 after some unexpected delays to the process. While the Company has received $8m of this funding already, in the form of promissory notes, the fundraising round has not completed, and the remaining capital has not yet been received and so a material uncertainty exists which may cast significant doubt about the group and the company’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. In the event that the current fundraising round does not complete, this may crystallise the payment of redemption premiums related to convertible loan instruments issued by the group and company (see note 25 for more details). However, the directors believe that, taken as a whole, the factors described above enable the group and the company to continue as a going concern for the foreseeable future. The financial statements do not include the adjustments that would be required if the group and company were unable to continue as a going concern.
This report was approved by the board and signed on its behalf.
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PIRATE STUDIOS LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31 DECEMBER 2022
The directors present their report and the financial statements for the year ended 31 December 2022.
The loss for the year, after taxation, amounted to £12,242,687 (2021: loss £17,216,587).
The directors who served during the year were:
The company has included mandatory directors' report disclosures within the strategic report as they are considered by the directors to be of strategic importance; as permitted by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.
Since the end of 2022, the group has raised $8m in additional capital as well as negotiating rolling extensions to all non-convertible debt currently held until the current fundraising round is complete.
It is a key term of the current fundraising round that all debt and convertible debt holders agree to convert their debt to equity before the new capital is committed and the Company has agreement from the required majority of debt holders for this. The current fundraising round is for an initial investment of $15m (of which $8m has been received to date in the form of promissory notes) followed by another $15m expected within the next 12-24 months. The lead investor also has the option to invest a further $25m. This funding is expected to close by the end of Q1 2024.
The auditors, Bishop Fleming LLP, will be proposed for reappointment in accordance with section 485 of the Companies Act 2006.
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PIRATE STUDIOS LIMITED
DIRECTORS' REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
This report was approved by the board and signed on its behalf.
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PIRATE STUDIOS LIMITED
DIRECTORS' RESPONSIBILITIES STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2022
The directors are responsible for preparing the Group strategic report, the Directors' report and the consolidated financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period.
In preparing these financial statements, the directors are required to:
∙select suitable accounting policies for the Group's financial statements and then apply them consistently;
∙make judgments and accounting estimates that are reasonable and prudent;
∙prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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PIRATE STUDIOS LIMITED
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF PIRATE STUDIOS LIMITED
We have audited the financial statements of Pirate Studios Limited (the 'parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2022, which comprise the Consolidated statement of comprehensive income, the Consolidated Statement of Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Equity, the Company Statement of Changes in Equity and the related notes, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland' (United Kingdom Generally Accepted Accounting Practice).
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the United Kingdom, including the Financial Reporting Council's Ethical Standard and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We draw attention to note 2.3 in the financial statements, which indicates that the Group and Parent Company are currently seeking additional funding to allow the Group and Parent company to trade for the foreseeable future, which is yet to be secured. As stated in note 2.3, these events or conditions, along with the other matters as set forth in note 2.3, indicate that a material uncertainty exists that may cast significant doubt on the Group's or the parent Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
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PIRATE STUDIOS LIMITED
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF PIRATE STUDIOS LIMITED (CONTINUED)
The other information comprises the information included in the Annual Report other than the financial statements and our Auditors' report thereon. The directors are responsible for the other information contained within the Annual Report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
In our opinion, based on the work undertaken in the course of the audit:
∙the information given in the Group strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
∙the Group strategic report and the Directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Group strategic report or the Directors' report.
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PIRATE STUDIOS LIMITED
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF PIRATE STUDIOS LIMITED (CONTINUED)
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Group financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
Identifying and assessing potential risks related to irregularities
∙We have considered the nature of the industry and sector, control environment and business performance including the design of the Company's bonuses.
∙We have considered the results of our enquiries of management including the CEO and CFO about their own identification and assessment of the risk of irregularities.
∙For any matters identified we have obtained and reviewed the Company's documentation of their policies and procedures relating to:
°Identifying, evaluating, and complying with laws and regulations whether they are aware of any instances of non-compliance;
°Detecting and responding to the risk of fraud and whether they have knowledge of actual, suspected, or alleged fraud; and
°The internal controls established to mitigate the risks of fraud or non-compliance with laws and regulations.
∙We have considered the matters discussed among the audit engagement team including internal tax specialists regarding how and where fraud might occur in the financial statements and potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified recognition of revenue, particularly regarding year end cut off, as the greatest potential for fraud. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act and tax legislation. In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements, but compliance with which may be fundamental to the Company's ability to operate or to avoid a material penalty. These included employment legislation and sales tax compliance. Audit response to risks identified We identified the recognition of revenue around year end cut off as key audit matter related to the potential risk of fraud. Our procedures to respond to risks identified included the following:
∙Undertaking various substantive tests of detail related to the recognition of revenue.
∙Reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements.
∙Enquiring of management concerning actual and potential litigation claims.
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PIRATE STUDIOS LIMITED
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF PIRATE STUDIOS LIMITED (CONTINUED)
∙Performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement or fraud.
∙In addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws or regulations throughout the audit. Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from an error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditors' report.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
for and on behalf of
Chartered Accountants
Statutory Auditors
10 Temple Back
BS1 6FL
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PIRATE STUDIOS LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
REGISTERED NUMBER:09669260
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2022
The financial statements were approved and authorised for issue by the board and were signed on its behalf by:
The notes on pages 21 to 47 form part of these financial statements.
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PIRATE STUDIOS LIMITED
REGISTERED NUMBER:09669260
COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2022
The financial statements were approved and authorised for issue by the board and were signed on its behalf by:
The notes on pages 21 to 47 form part of these financial statements.
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
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COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Pirate Studios Limited is a private company, limited by shares, incorporated in England and Wales under the Companies Act 2006. The address of the registered office is given on the company information page and the nature of the company's operations and its principal activities are set out in the strategic report.
The company has determined that GBP is its functional currency.
2.ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost convention unless otherwise specified within these accounting policies and in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and the Republic of Ireland and the Companies Act 2006.
The preparation of financial statements in compliance with FRS 102 requires the use of certain critical accounting estimates. It also requires Group management to exercise judgment in applying the Group's accounting policies (see note 3).
The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own Statement of comprehensive income in these financial statements.
The following principal accounting policies have been applied:
The consolidated financial statements present the results of the Company and its own subsidiaries ("the Group") as if they form a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.
The consolidated financial statements incorporate the results of business combinations using the purchase method. In the Statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the Consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date control ceases.
Page 21
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
The Group and Company recovered quickly from the COVID-19 pandemic and whilst there are still some knock on effects of the pandemic and other factors like the war in Ukraine resulting in a cost of living crisis we have seen the underlying business continue to improve from both a revenue and profitability point of view throughout 2022 and 2023.
Management has run various forecast scenarios for a period of at least 24 months from the date of signing of these financial statements to determine the impact on profitability and cashflow in the event of depressed revenue. In each scenario, the group’s current portfolio and cost base, including the servicing of operating lease commitments that are held off balance sheet (note 27 to the financial statements), produces a sustainable, cash-generative business and, as a result, the financial statements are prepared on a going concern basis. The Directors recognise the importance of the leased property portfolio to the functioning of the business model, therefore regularly review the performance of each location which helps to inform future decisions related to the properties they operate in. The minimum cash requirement for the next 24 months is $4m. However, under the worst case scenarios $6m of capital would be required in 2024 and a further $2m would then be needed in 2025 which would mean having to draw down the full $15m of the initial investment being sought as part of the current fundraising round detailed below, alongside a further $1m of the second tranche. This is the worst case scenario considered by management from a cash burn point of view but it does include some growth and revenue driving initiatives. As it only requires $1m of the second tranche of $15m, management also consider this to be ample headroom on cash. The directors have a successful history of raising financing from similar transactions, having raised additional equity and debt from both existing and new investors in each of the previous years. Notably, since the end of 2021, the group has raised over £12m in additional capital as well as negotiating the framework of a debt restructure agreement as part of it’s current funding round. The current fundraising round is for an initial investment of $15m (of which $8m has been received to date in the form of promissory notes) followed by another $15m expected within the next 12-24 months to fund growth. The lead investor also has the option to invest a further $25m. This initial funding is now expected to close by the end of Q1 2024 after some unexpected delays to the process. While the Company has received $8m of this funding already, in the form of promissory notes, the fundraising round has not completed, and the remaining capital has not yet been received and so a material uncertainty exists which may cast significant doubt about the group and the company’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. In the event that the current fundraising round does not complete, this may crystallise the payment of redemption premiums related to convertible loan instruments issued by the group and company (see note 25 for more details). However, the directors believe that, taken as a whole, the factors described above enable the group and the company to continue as a going concern for the foreseeable future. The financial statements do not include the adjustments that would be required if the group and company were unable to continue as a going concern.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
Functional and presentation currency
Transactions and balances
If it is not possible to distinguish between the research phase and the development phase of an internal project, the expenditure is treated as if it were all incurred in the research phase only.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
Grants of a revenue nature are recognised in the Consolidated statement of comprehensive income in the same period as the related expenditure. The fair value of the award also takes into account non-vesting conditions. These are either factors beyond the control of either party (such as a target based on an index) or factors which are within the control of one or other of the parties (such as the Group keeping the scheme open or the employee maintaining any contributions required by the scheme). Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to profit or loss over the remaining vesting period. Where equity instruments are granted to persons other than employees, profit or loss is charged with fair value of goods and services received.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
All intangible assets are considered to have a finite useful life. If a reliable estimate of the useful life cannot be made, the useful life shall not exceed ten years.
Depreciation is charged so as to allocate the cost of assets less their residual value over their estimated useful lives, using the straight-line method.
Depreciation is provided on the following basis:
The assets' residual values, useful lives and depreciation methods are reviewed, and adjusted prospectively if appropriate, or if there is an indication of a significant change since the last reporting date.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in profit or loss.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
Provisions are measured as the best estimate of the amount required to settle the obligation, taking into account the related risks and uncertainties.
The Group has elected to apply the provisions of Section 11 “Basic Financial Instruments” of FRS 102 to all of its financial instruments.
Financial instruments are recognised in the Group's Statement of financial position when the Group becomes party to the contractual provisions of the instrument.
Financial assets and liabilities are offset, with the net amounts presented in the financial statements, when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Basic financial assets
Basic financial assets, which include trade and other receivables, cash and bank balances, are initially measured at their transaction price including transaction costs and are subsequently carried at their amortised cost using the effective interest method, less any provision for impairment, unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest.
Discounting is omitted where the effect of discounting is immaterial. The Group's cash and cash equivalents, trade and most other receivables due with the operating cycle fall into this category of financial instruments.
Other financial assets
Other financial assets, which includes investments in equity instruments which are not classified as subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the recognised transaction price. Such assets are subsequently measured at fair value with the changes in fair value being recognised in the profit or loss. Where other financial assets are not publicly traded, hence their fair value cannot be measured reliably, they are measured at cost less
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
2.ACCOUNTING POLICIES (continued)
impairment.
Financial liabilities
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instruments any contract that evidences a residual interest in the assets of the Group after the deduction of all its liabilities.
Basic financial liabilities, which include trade and other payables, bank loans, other loans and loans due to fellow group companies are initially measured at their transaction price after transaction costs. When this constitutes a financing transaction, whereby the debt instrument is measured at the present value of the future receipts discounted at a market rate of interest. Discounting is omitted where the effect of discounting is immaterial.
Debt instruments are subsequently carried at their amortised cost using the effective interest rate method.
Trade payables are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if the payment is due within one year. If not, they represent non-current liabilities. Trade payables are initially recognised at their transaction price and subsequently are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial.
Derecognition of financial assets
Financial assets are derecognised when their contractual right to future cash flow expire, or are settled, or when the Group transfers the asset and substantially all the risks and rewards of ownership to another party. If significant risks and rewards of ownership are retained after the transfer to another party, then the Group will continue to recognise the value of the portion of the risks and rewards retained.
Derecognition of financial liabilities
Financial liabilities are derecognised when the Group's contractual obligations expire or are discharged or cancelled.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The critical judgments made by management that have a significant effect on the amounts recognised in the financial statements are described below. Critical judgments Impairment of the group's tangible and intangible assets Factors taken into consideration in reaching such a decision include the economic viability, capitalisation of software development and expected future financial performance of the asset and where it is a component of a larger cash-generating unit, the viability and expected future performance of that unit. Capitalisation of software development costs There is judgement involved with regards to development costs being capitalised and whether they satisfy the criteria per FRS 102 to be capitalised. Capitalisation of a particular activity commences after proof of concept, requirements and function concept stages are complete, and once the directors are satisfied that future economic benefit will be delivered by the assets developed. Capitalisation of payroll costs There is judgement involved with regards to payroll costs being capitalised and whether they satisfy the criteria per FRS 102 to be capitalised. Software developer and project manager costs relating to the creation of digital assets that satisfy this criteria are tracked by time spent on a project basis and are classified as intangible assets and amortised on a straight line basis over 5 years in line with the intangible asset amortisation policy. Payroll costs incurred by our rollout and construction team are entirely associated with both current and future studio builds that satisfy the criteria to be capitalised and are classified as leasehold improvements and depreciated on a straight line basis over 5 years as their time is not allocated by project and 5 years is the shortest lease length within our portfolio. Classification of preference shares There is judgement involved in determining whether preference shares are classified as debt, equity or compound financial instruments. Key factors that impact decision making are: whether there exists a mandatory obligation for the company to redeem the shares in cash and whether the conversion feature, if exercised, results in a fixed number of preference shares being converted into a fixed number of ordinary shares. Recognition of convertible loan note redemption premium (see note 25) There is judgement involved in determining whether the redemption premium associated with debt instruments should be accrued in the financial statements. The directors have considered the possibility of the events that trigger redemption occurring and have concluded it is not probable that a redemption event will occur. Key factors that impact the judgement include the directors' track record of successfully converting similar instruments into equity, and the status of the current fundraising round. Key sources of estimation uncertainty Cash flow forecasts - going concern Cash flow forecasts from the year ended 2022 have been prepared in support of the going concern assessment. Estimates have been explored in more detail within the going concern section of the accounting policy note 2.3, which relates to the future estimated revenue, costs and cash position expected until at least March 2026. Multiple scenarios have been assessed based on revenue
Page 28
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
3.JUDGMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUED)
Tangible fixed assets (see note 13) Tangible fixed assets are depreciated over their useful lives taking into account residual values, where appropriate. The actual lives of the assets and residual values are assessed annually and may vary depending on the number of factors. In re-assessing asset lives, factors such as technological innovation, product life cycles and maintenance programmes are taken into account. Residual value assessments consider issues such as future market conditions, the remaining life of the asset and projected disposal values. Dilapidations provisions (see note 20) Dilapidations provisions are recognised where there are "make good" clauses in the group’s operating lease agreements. The directors build up their dilapidations provisions over the term of the lease such that they represent the directors' best estimate of the amount required to remove leasehold improvements and put the property back into the condition at the inception of the lease.
The whole of the turnover is attributable to the principal activity of the group.
Analysis of turnover by country of destination:
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 31
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
11.TAXATION (CONTINUED)
No deferred tax asset has been recognised in respect of trading losses available to carry forward and offset against future profits.
As enacted by the Government on 24 May 2021, the main rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023.
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13.TANGIBLE FIXED ASSETS (CONTINUED)
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 36
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 37
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 38
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Convertible loans
There are 4 facilities included within the convertible loans balance: Facility 1: £20,000,000 facility originally dated 15 May 2019, and restated on 14 July 2020 to become a £7,900,000 facility, of which £7,893,000 has been drawn down. Facility 2: £7,100,000 facility dated 14 July 2020, which has been fully drawn down. Facility 3: £10,000,000 facility, half funded by existing investors, and half funded by the British Business Bank, which has been fully drawn down. Facility 4: £4,000,000 facility, of which £3,967,187 has been drawn down. Facility 5: £3,500,000 facility, of which £1,880,000 has been drawn down. Facility 6: £5,000,000 facility, which has been fully drawn down. The balances included on the balance sheet are the principal and accrued interest amounts. No equity component has been recognised in respect of the above convertible loan notes due to the conversion being into a variable number of shares. The redemption premium payable on the redemption of the loans has not been recognised in the financial statements (see note 25 for more details in relation to this). Deep discount bonds Deep discount bonds originally redeemable on 21 June 2020 were extended until 21 June 2022. Since the year end it was agreed that these bonds would be extended on a rolling basis until the current fundraising process is complete. The increase in balance of deep discounted bonds is entirely due to the accrued effective interest during the year. No new bonds were issued. Loans and promissory notes Loans consist of two long term loans with annual interest rates of 10.95%, one totalling £1,055,962 (2021: £1,000,000), and another totalling £1,243,923 (2021: £1,178,000). During 2021 a previous loan of £1,000,000 was repaid, and the loan for £1,178,000 was drawn down. Both loans have been extended on a rolling basis until the current fundraising process is complete. Promissory notes consists of 2 notes of $500,000 each. Interest accrues at 20% per annum with a 5% cash coupon paid quarterly in arrears and the balance of 15% of unpaid interest added to the principal of the note. The note is callable on the occurrence of certain future events, in which case additional interest would be payable. Management have assessed the likelihood of those future events occurring and consider them unlikely to occur. Management have calculated the additional interest that would be accrued to the balance sheet date under those conditions and have concluded it to be immaterial.
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 40
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 41
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
21.SHARE CAPITAL (CONTINUED)
Share class summary rights
- Preference B2 Ordinary shares accrue a fixed cumulative annual dividend of 10% and are redeemable preference shares with full voting rights. - Preference B1 Ordinary, Preference A Ordinary and Preference B Ordinary are shares are preference shares with full voting rights but do not confer any rights of redemption. - Deferred Shares do not confer any voting rights, nor do they confer rights of redemption or to dividends. Liquidation preference - The preference B1 and Preference B2 Ordinary Shares rank first on a liquidation, followed by the Preference B and Preference A Ordinary shares. Summary of activity in the year - 1,607 C Ordinary shares were subscribed for.
Share premium account
Capital redemption reserve
Foreign exchange reserve
Profit and loss account
Page 42
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
Page 43
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
A prior year adjustment has been recognised in respect of accounting for convertible loan notes issued in previous periods. Due to the conversion terms stating that the share price is set, and therefore the conversion being for a variable number of shares, no equity component should be accounted for on the issue of the instruments. As a result, the debt component of the instrument was under-valued, and therefore the residual value recognised in other components of equity being over-valued. This has also had an effect on the interest charge recognised in the profit and loss account.
The effect of the prior year adjustment on previously reported results and balances is as follows:
Page 44
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
24.PRIOR YEAR ADJUSTMENT (CONTINUED)
Page 45
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
A number of the group's issued convertible loan notes have a redemption premium that is payable in the event that the notes are redeemed.
Redemption can occur as a result of a number of events, these include: - An event resulting in immediate redemption (this includes administration, winding-up, liquidation, and other similar events). - Redemption at maturity date. - Voluntary redemption, which requires an agreement in writing by a noteholder majority and the company. The directors have considered the possibility of the loans being redeemed at some point in the future and consider that it is not probable that they will be redeemed. The key judgements in relation to this include the directors' track record of successfully converting similar instruments into equity, as well as the status of the current fundraising round, which is expected to close by the end of Q1 2024, and will result in the conversion of all existing convertible loan notes into equity. In the event that the loan notes are redeemed, the total redemption premium payable on all active instruments at the balance sheet date is £20,247,187.
The Group operates a defined contributions pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The pension cost charge represents contributions payable by the Group to the fund and amounted to £104,076 (2021: £81,028). Contributions totalling £61,375 (2021: £87,957) were payable to the fund at the reporting date and are included in creditors.
Page 46
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PIRATE STUDIOS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
It is a key term of the current fundraising round that all debt and convertible debt holders agree to convert their debt to equity before the new capital is committed and the Company has agreement from the required majority of debt holders for this. The current fundraising round is for an initial investment of $15m (of which $8m has been received to date in the form of promissory notes) followed by another $15m expected within the next 12-24 months. The lead investor also has the option to invest a further $25m. This funding is expected to close by the end of Q1 2024.
In the opinion of the directors there is no ultimate controlling party.
Page 47
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