I doubt that there was the slightest sense of embarrassment at last week’s AIM awards (a ghastly sounding knees up for the world’s seediest stock market) when First Derivatives (FDP) picked up two gongs: Best Technology award for the company itself and Entrepreneur of the Year Award for its founder and CEO Brian Conlon. Presumably these awards were decided well before First’s price tanked amid some serious concerns being raised and the organisers, in true AIM style, were too gormless to think on their feet and give them out to a less dodgy enterprise. After an excellent report on FD by Shadowfall was made public by ShareProphets recently, sellside analysts Goodbody, Liberum, and now Berenberg were quick to leap into action with feeble rebuttals which glossed over a lot of the points made and simply ignored the more serious ones.
For instance, on the association with the auditors, the Northern Irish office KPMG, and related matters, Goodbody writes: 'Don’t believe Brian has worked there for over 20 years and implication appears to be one of guilt by association, rather than any evidence specifically levelled against FD'. The appropriateness of hiring KPMG Belfast for a nineteenth straight year as auditor ought to be questionable in its own right. That one of its four former partners who “retired” in 2016 after being arrested in a tax evasion probe, personally signed off FD’s accounts between 2010 and 2014, and another was employed by First out of “retirement” in 2017, seems worthy of comment. To the point that First has been acting like a venture capital ploughing money into start-ups Goodbody and Liberum contradict one another and both are evidently wrong.
Goodbody writes: 'From the outset we have been told that the model is either in the form of a revenue sharing model or direct equity investment in lieu of Kx technology'. Liberum writes: 'Kx Fund portfolio companies are indeed small and some do not generate revenue, but the announcements do not suggest any equity investments have been made and we are aware that many of these partnerships work under revenue share agreements in exchange for using the Kx technology to speed up development'. Companies house reveals that First has direct equity investments in several of the companies listed by Shadowfall. Indeed, Liberum highlights one such, a cash investment of £2.7 million and neither firm attempts to explain the destination of the rest of the £11.9 million of investments recorded as spent in the company’s own cashflow statements for 2017 and 18.
Of most concern, however, is the lack of comment or explanation of First’s subsidiary Kx Systems. Before it was consolidated into the accounts when First increased its stake to 65.2% in the year to 2015, it appears Kx seemed to be a shrinking business. FD’s share of its profits between 2011 and 2015 was £1.87 million but strangely it was paid out £4.2m in dividends. Since the consolidation, presumably First owes the minority shareholders in Kx dividends, yet curiously there seems to be no minority interest line in its accounts. A clue to this may be that in the three years since consolidation First’s cashflow statements show much greater amounts paid out in dividends than were due to its ordinary shareholders. In 2018 £5.272 million was owed to shareholders yet £8.31 million in dividends were paid out. If, as seems likely, the difference of £3.038 million went to Kx for its 34.8% share then this would imply that Kx was making a profit of almost £9 million that year: practically the entire group’s earnings. If that is the case, then what has happened to the rest of group earnings? If it is not the case, then what is the explanation for the excess amounts now being paid in dividends?
The increase in the Kx holding in October 2014 was at a huge premium in price to the one paid previously (and which came at a time that the company appeared to be performing badly), resulting in a huge £68 million of goodwill being recorded against assets of a fraction of that (£12 million). No justification was given at the time for this. Not only that but FD recently agreed to allow a put option to be exercised in which it has agreed to stump up a further £32 million for the minority interest by June next year as well as a profit share in dividends of a further £9.2 million for the period to October 2021. It seems strange to say the least to continue pay out dividends after an asset has been acquired. On what basis were the future profits calculated and why wasn’t this extra payment disclosed at the time the put option was granted? This all looks very murky and if there is a reasonable explanation the company should come up with a clarification for its rattled shareholders.
On top of the unanswered Shadowfall concerns, I see that ShareProphets has also published some matters which no doubt will be brushed aside as “legacy issues” The most serious of these is that the flotation of First Derivatives in 2002 was based on a false prospectus in which around 25% of the company’s sales were clearly fictitious. When a company owes its existence as a public company to such, matters, in my experience, tend to get ultimately worse not better on that front, however much the share price is flattered in the interim by these shenanigans. At £30 the shares are a straight sell until First Derivatives comes out with a full explanation of the matters raised, starting with the IPO peccadillos right up to the issues raised by Kx Systems.
Filed under: First Derivatives, FDP, Footasylum, BT, Nanoco, Columbus Energy, Ariana Resources
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