Quindell (Watchstone), SFO inaction and Tungsten Corporation

The Daily Telegraph this morning (25/2/2019) disclosed that law firm Harcus Sinclair is preparing a legal case for investors who lost money in Quindell (now renamed Watchstone). Quindell was once the largest AIM company – valued at £2.6 billion. But its accounts were extremely dubious and many investors think they were downright fraudulent. The company is still being investigated by the Serious Fraud Office (SFO) but only two days ago it was announced that the SFO was dropping investigations into Rolls-Royce and GlaxoSmithKline. The SFO said there was “either insufficient evidence” or it was “not in the public interest” to continue. That’s despite the fact that Rolls-Royce paid nearly £500 million under a Deferred Prosecution Agreement over the allegations of bribery and corruption. Will the Quindell case be dropped also one wonders?

Watchstone (WTG), now worth £44 million, is also the subject of a law suit by Australian firm Slater & Gordon over the acquisition of businesses from the company in 2015. They claim breaches of the warranties and deceit but Watchstone denies they have a valid claim.

Why is it so difficult to pursue directors and other senior executives over false accounts? Tesco was a similar situation where the company conceded wrongdoing and paid a fine but the prosecutions of individuals collapsed. It seems clear that the whole legal framework for fraud under which the SFO operates needs reviewing and changing to make such cases easier to prosecute. Either that or companies should not be conceding wrongdoing and paying fines (a charge on shareholders effectively) when it cannot apparently be proven. It’s the individuals who need convicting, not the company, if future frauds are to be deterred.

Also this morning Tungsten (TUNG), another AIM company and in which I have a miniscule holding, issued a trading update. This is a company that has been consistently loss making, and it was always doubtful whether it had a viable business model in the new sector of electronic invoicing and supply chain enablement.

CEO Richard Hurwitz, who was appointed to the board in 2015, after a revolution, left “with immediate effect” on the 14th February. He did seem to have made changes in the last three years that gave some hope that the company was not going to continue to be a bottomless cash pit. But losses persisted. However, this mornings announcement was somewhat more positive in that it mentioned “significant reductions in the cost base over the past three years” and there are other changes afoot including a review of the Group’s “remuneration structures”. That includes a reduction in cash bonuses in favour of shares and introduction of “clearly defined performance conditions”. Perhaps that prompted the CEO to quit (he got paid £1.3 million last year despite the company still losing money).

Other good news was that net cash inflow of £0.5 million in the quarter represented the first ever positive cash flow from operations! But the underlying EBITDA of £0.4 million includes a “seasonal working capital” inflow of £1 million so the “normalised” cash outflow was still £0.5 million. Does that make sense or is this fanciful presentation?

The share price only perked up slightly this morning on this announcement which probably reflects continuing concerns about when it will actually show some profits and (and I am not just talking about EBITDA), and the added uncertainty of a new CEO but it seems good candidates have already been lined up.

Still a “wait and see” situation so far as I am concerned.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Tungsten, RedstoneConnect, Proactis, LoopUp, Mello and productivity

ITesterday there was an announcement by Tungsten Corporation (TUNG) that there was press speculation about a possible requisition of a general meeting to remove some of the directors, including the Chairman and CEO, and appoint others. This is likely to come from Odey Asset Management supported by other large investors the company understands. Their combined holdings could give them a good chance of winning any vote, or at least it would be a hard-fought proxy battle.

It would seem that the former CEO Edi Truell is involved in this initiative. It would be most unfortunate in my view if he returns to this business (and I did purchase a very few shares in the company after he departed which I still hold). Richard Hurwitz has done a good job in my view of turning this company from a financial basket case with very substantial annual losses into a sounder one. Revenue has been rising and costs have been cut although profits have been longer to appear than hoped. However the company does report that EBITDA was at breakeven for the first four months of the calendar year. It’s at least heading in the right direction now so I am unlikely to be voting for any such requisition.

I attended the Mello event at Hever yesterday and was hoping to get an update from Mark Braund on RedstoneConnect (REDS) where he was due to present. But his presentation was cancelled. Now we know why because an announcement this morning from the company said he was leaving. Perhaps he wants a new challenge. This was another basket case of a company where Mark turned it around in the two years he has been there. So some investors may not be pleased with his departure and the share price predictably dropped on the news. The new CEO will be Frank Beechinor who is currently the Chairman. He is also Chairman of DotDigital and clearly has experience of running IT companies so it’s probably a good choice. A new non-executive Chairman has been appointed (Guy van Zwanenberg).

The Mello event, organised by David Stredder of course, was held near Hever Castle in deepest Kent. I know some of the roads in the area as I live nearby but even so managed to get lost. Not the ideal location. But it was a useful event otherwise. I did an interview for Peter of Conkers Corner and sat on the panel covering the Beaufort case. Videos of both are likely to be available soon, and I will tweet links to them when they appear.

A company that did present at Mello was Proactis (PHD) with CEO Hamp Wall doing the talking. I was unsure of the potential future growth for the company as I thought the market for procurement software might be quite mature (i.e. most likely users had such a product/service). But not so it seems, particularly in the USA and their target vertical segments. Hamp spoke clearly and answered questions well. He is clearly an experienced IT sales/marketing manager. He said he was surprised though that the share price fell over 40% recently when they announced the loss of two of their largest customers. He thought it might fall 15%. I agreed with him that it seemed excessive. But the market does not like surprises.

Today I attended the AGM of LoopUp Group (LOOP) who sell conferencing software. They recently merged with a competitor named MeetingZone and it looks likely to double revenue and more than double profits if things go according to plan. The joint CEOs made positive noises about progress. The company is chaired by heavyweight Chairperson Lady Barbara Judge CBE which is somewhat unusual for this kind of company – at least heavyweight in terms of past appointments if not lightweight in person.

Tim Grattan was the only other ordinary shareholder present and may do a fuller report for ShareSoc. A disappointing turnout for a very informative meeting as both I and Tim asked lots of questions.

Tim advised me after I mentioned the Foresight 4 VCT fund raising that it was odd that no mention was made in the prospectus of the alleged illegal payment of a dividend. Is this not a “risk factor” that should have been declared he asked? That company and its manager seem to be turning a blind eye to that problem.

There was an interesting letter from Peter Ferguson in the Financial Times today. It covered the issue of a declining productivity growth in the UK and other countries aired in a previous article by Martin Wolf. This is certainly of concern to the Government and should be to all investors because only by increasing productivity can we get richer. Mr Ferguson suggested one cause was the negative impact of increasing regulation. He suggested it has three impacts: 1) more unproductive people appointed to monitor and enforce the regulations, 2) more compliance officers, and 3) less productivity as a result in companies due to sub-optimal practices. Perhaps fortuitously I am invested in a company that sells risk and compliance solutions. It’s certainly a growth area and there may be some truth in this argument. Has MIFID II reduced productivity in the financial sector with few benefits to show for it? I think it has.

But Rolls-Royce are going to improve the productivity in their business at a stroke. They just announced they are going to fire 4,600 staff. But are any of them risk and compliance staff?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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