Small Cap Value Report (12 Nov 2014) - TRCS, FLYB

Wednesday, Nov 12 2014 by

Good morning!

Equities First Holdings

This is an American, apparently unregulated, finance company which has been doing deals with UK listed company Directors, to provide "loans" against Director shareholdings in their companies. However, a little digging online shows that EFH's modus operandi is clearly to sell the shares that are transferred to them as collateral, and that the "loan" is non-recourse - i.e. that the borrower can just walk away from it, with no penalty.

Directors at five companies appear to have used this facility - one is Quindell (which I can now mention, as I am no longer short of it, as of this morning), IQE, IGas, CloudBuy, and Angle.

It appears that the loan facilities could be used as a backdoor way of Directors selling shares, in a way which avoided having to disclose that to the market, or so they thought. It could even be used to disguise selling of shares, and make it look as if the Director is buying shares (if some new shares were simultaneously bought with the "loan" proceeds).

The whole thing has unraveled, and three of the five companies concerned have been forced to issue clarification or correction statements. It's possible that some of the Directors involved did not realise the consequences of using this arrangement, but it has reflected badly on all of them.

Shares in Quindell (LON:QPP) have been in freefall, and I expect to see the departure of the founder within days, in similar circumstances to which he was ejected from his previous listed company Innovation (LON:TIG). Good riddance quite frankly. I'm afraid that type always come unstuck eventually.

Shares in Cloudbuy (LON:CBUY) (statement today) and Angle (LON:AGL) (statement today) are also down sharply today. Although in both these cases it looks as if the Directors concerned were probably genuine, in wanting funds for a house purchase, and were probably unaware that the modus operandi of EFH appears to be that they immediately dump the transferred shares in the market.

The FCA, or whoever it is that is supposed to be regulating London markets, needs to issue some immediate instructions on this subject. Although the hot water that the above companies have got themselves into will surely deter other Directors from going down this very…

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Tracsis plc is a holding company. The Company is engaged in the business of software development and consultancy for the rail industry. Its segments include Rail Technology and Services, and Traffic & Data Services. The Rail Technology and Services segment includes its Software, Consultancy and Remote Condition Monitoring Technology, and also includes Ontrac Limited and Ontrac Technology Limited (together being Ontrac). The Traffic & Data Services segment includes data capture, analysis and interpretation of traffic and pedestrian data to aid with the planning, investment and ultimate operations of a transport environment and it also includes SEP Limited (SEP). It provides software products, consultancy services and delivers customized projects to solve a range of problems within the transport and traffic sector. It specializes in solving a range of data capture, reporting and resource optimization problems along with the provision of a range of associated professional services. more »

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Flybe Group PLC is a United Kingdom-based company. The Company is a shell company.

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  Is LON:TRCS fundamentally strong or weak? Find out More »

44 Comments on this Article show/hide all

Webpax 12th Nov '14 25 of 44

In reply to post #87719

Thanks for the explanation Paul.

I'd be interested in you thoughts on the Flybe (LON:FLYB) results if you get the chance.

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JPshares 12th Nov '14 26 of 44

Hi Paul,

I've followed the whole Equity First saga with interest, and ignoring the underlying reasons of why Quindell, Cloudbuy etc are using this facility, I'm still a bit puzzled by Equity First's 'business model'.

You mention their "modus operandi is clearly to sell the shares that are transferred to them as collateral". I agree.

What I don't understand from their perspective is, say they sell the shares and pocket some cash, but then 2 or 3 years down the line the loan is paid back and the Director/CEO wants their shares back, what are they going to do if the share price has increased? Say Cloudbuy (LON:CBUY) has a unique IP that massively takes off and the shares 10 bag over the couple of years. How on earth are they going to afford to buy the shares back at multiples of what they've made on the loan in terms of initial discount plus the 4 or 5% interest rate?

Surely the potential risk involved of loaning against shares in companies that could go up automatically adjusts their selection criteria to avoid "good" companies, and only loan against shares in companies where there is a high degree of certainty that the related share price will be significantly less by the end of the term?

Furthermore, it's in their INTERESTS to do whatever they can to bring the Share Price down e.g. through selling the collateral shares, since

1) If they tank the Share Price, they can buy the shares back at a significant reduction (if it ever really came to that), and
2) If they tank the share price below 80% of the value at the time of the loan, they can make a margin call for even more collateral.

Whatever way I look at it, I cannot see how any of this is in the interests of investors?

THE SELLER / DIRECTOR / CEO - Gets instant cash for shares whilst masking the fact they are reducing their holding and are therefore not seen to be directly influencing a share price decline like a direct sale into the market would.

EQUITY FIRST - Make money in the difference between the discounted loan arrangement through selling the shares, receive interest on the loan, and potential to make more money if they can bring the share price down to get a margin call. Not interested in loaning against "good" companies whose Share Price might be higher at the end of the term.

INVESTORS - Value of investment goes down as shares are dumped into the market and investment case for PI's buying into the stock lowered through being tainted by the fact the stock has passed Equity First's selection criteria of a stock not expected to increase over the next few years.

So can we assume therefore that the interests of Equity First are in direct contrast to the interests of the PI's, and as such, the Directors who are doing these deals are also effectively operating in contrast to the interests of their own shareholders through doing these types of deal?

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cig 12th Nov '14 27 of 44

In reply to post #87691

If EFH didn't have full title, they would take the risk the director just runs with the money and keeps their shares, so they need something more or less equivalent to full title, give or take a few minor restrictions like not voting them if they keep them on their own account.

Still the director has a call option to buy them back (should EFH not default), so they've got some residual interest, hence why it doesn't show up as a sale in the regulatory shares count the director has an economic interest in -- although the real economic interest is much diminished because of the optionality protecting the downside.

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Paul Scott 12th Nov '14 28 of 44

In reply to post #87723

Hi JPshares,

I agree with your comments. I believe that, in the majority of cases, Equities First will realise that their offering will attract Directors of companies where it is very unlikely that the share price will be higher in 2-3 years' time. So it's really an exit route for Directors of dubious companies.

EFH has been sued by people who have tried to redeem their stock, only to discover that EFH has sold it - you can find such legal cases easily on Google. So it's very far from a reputable organisation. Who in their right mind would sign away their physical shares to some unregulated outfit in America? Either the desperate, or the naive, I would suggest.

The problem is that TW has blown the lid off the whole thing, and forced 5 companies to put out correction statements, and put a rocket under the relevant NOMADs too, and if ThisIsMoney is to be believed, has got the FSA on the case too.

People may not like his style, but he's actually doing the PI community a huge service by shining a light on the murkier depths of AIM. More power to him I say. It sickens me the way longs in certain stocks try to shoot the messenger, whilst blithely ignoring obvious wrongdoing at companies which they hold, simply because they are blinded by their own financial self-interest.

Just look at the shares on my Bargepole List - it's not even been going 4 months, but has already correctly identified lots of disastrous shares, with few false negatives too. So heeding red flags is incredibly important. It utterly mystifies me why so many PIs seem to want to be ripped off, blindly ignoring all the warnings from experienced investors.

Anyway, despite all the abuse I've had thrown at me elsewhere, I'll very much carry on doing what I'm doing, as it saves people who listen potentially a lot of money.

Regards, Paul.

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BrianGeee 12th Nov '14 29 of 44

In reply to post #87719

"That's just Stockopedia's editorial policy, which I have to comply with"

Seriously poor judgement from Stockopedia in putting subscriptions from low grade members before transparency and open discussion. I recognise that such discussion perhaps requires more moderation to keep it civil, but the answer is not censorship of a particular class of valid views, and inhibiting the exposure of poor investments and wrong-doing.

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intuitive6191 12th Nov '14 30 of 44

Excellent discussion on EFH.

I would certainly agree that it is a purely a device for Directors of questionable companies to walk away with some cash. As a someone said - deal with EFH and you are raising the white flag to shorters.

In truth this is just a another symptom of the totally dysfunctional AIM market. Paul makes a fine attempt to create a bargepole list, but it would be much easier to start the other way round and try to list the decent companies on AIM.

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Ramridge 12th Nov '14 31 of 44

Hi Paul
Re TRCS. I have just finished listening to the audiocast, and John McArthur the CEO comes across as a very credible and 'backable' leader. Prospects for the next FY look really good and I'll be investing.

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Paul Scott 12th Nov '14 32 of 44

In reply to post #87732

Hi Brian,

In fairness, the editorial rule only applies to me, and other Stockopedia writers such as Ben & Alex.
All Stockopedia members can of course discuss anything they like, and are not censored at all.
So other people with shorts on stocks can talk about them here.

I'm fine with the editorial policy here. In the past when I got over-excited & broke the rule, it dragged the discussion into the gutter, as it attracted a whole load of nutters from advfn over here. Quite frankly, I'd rather they stayed put on advfn & hurled abuse at each other there!!!

Regards, Paul.

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nigelpm 12th Nov '14 33 of 44

A non-binding agreement to repurchase the shares in two or three years' time, does not negate the reality that the shares have been transferred to another party, in return for money - which to any rational person would be called a sale

From an accounting perspective the question is have the risks and rewards of ownership transferred?

It's not completely clear to me in that the borrower must make a margin call if the share falls below a certain level.

However, in cloudbuy's statement today it notes :

  The Agreement contains a margin call, if the value of the shares falls below 19.5p Mr Duncan may either terminate with no further liability or provide additional security in cash or shares.

So in other words, the director can terminate the agreement if the shares fall below a certain level and at that point the risks and rewards of ownership are fully passed over hence it's safe IMHO to call it a sale.

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Sully8786 12th Nov '14 34 of 44

In reply to post #87738

Hi Paul,

The interview with the Tracsis (LON:TRCS) CEO keeps crashing :(



Company: Dave Sullivan - Talking Stocks
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Paul Scott 12th Nov '14 35 of 44

In reply to post #87741

Hi Sully,

Sorry about that. The audio hosting is out of my hands unfortunately. AudioBoom & SoundCloud host it. If one link is proving troublesome (pls let me know which), then try the other (below);

Regards, Paul.

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Sully8786 13th Nov '14 36 of 44

In reply to post #87742

Hi Paul,

Thanks, I'll try those later. It was the link from Stockopedia that kept breaking up. I'll let you know if I get any issues with the other links




Company: Dave Sullivan - Talking Stocks
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Monty9 13th Nov '14 37 of 44

Re EFH. Interesting legal arrangement. If the stock is, or has been, sold by EFH then on the face of it they are short and are using the company director as a 'lender.' Is it really the case that neither the loan, nor the stock may be returned at the choice of the respective owners of the stock or money? That means the clause covering repayment is totally meaningless and the transaction is a sell by director and purchase by EFH. If it was otherwise the owner has a call option, which in a stock like QPP over 2 years would be way too expensive to make sense.
I dare say that if the rules were changed to force disclosure of the sale, alternative schemes would be dreamed up to achieve much the same objective, allowing the directors trade their stock ahead of the public, ideally secretly. One of the best things about this website, and other more aggressive publications, it the ability to inform the public and let them form their own opinion. Personally I was surprised to see IQE among the companies doing this.

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Laughton 13th Nov '14 38 of 44

Hi Paul,

Just come across your thoughts on Flybe - but only because I received a link from elsewhere. I usually read your post when I get the email notification and then refresh the page a few times through the day to read the comments section. But the Flybe write up was obviously done late in the day so easily missed - and then the next day comes along.

Isn't there some way of letting regulars know if you've covered a share very late in the day - either by a second email notification or a note on the next day's Report or something similar?



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JPshares 13th Nov '14 39 of 44

In reply to post #87725

Cheers for the reply Paul, I think you're absolutely spot on.

Please keep up the good work and stick to your guns even if exposing the truth is not what people want to hear. I lost a lot of money in my early investments purely because I buried my head in the sand and didn't want to accept that I had made a mistake. I'm sure others will realise in due course that the work you do is in all investors best interests, even if it is (and often it REALLY is!!) a bitter pill to swallow at the time.

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Paul Scott 13th Nov '14 40 of 44

In reply to post #87775

I usually Tweet out if I've updated a SCVR late.


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Laughton 13th Nov '14 41 of 44

Ah - not so good for us (or maybe it's just me) that do not twitter or facebook or other "social media"



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Paul Scott 13th Nov '14 42 of 44

In reply to post #87789

In practice, it's very rare for me to update any SCVRs after about 3pm, but occasionally I get swamped with other things & then catch up in the evening. I like to keep the archive as complete as possible. You can always search for comments on any company by putting its ticker into the search box at the top of the page - that will then list (under the "Discuss" tab) all comments from me & others on that company.


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Damian Cannon 14th Nov '14 43 of 44

In reply to post #87789

I've recently discovered something that might help:

By default this shows the most active (recently updated) articles and so if Paul makes a change or somebody adds a comment then the article will be towards the top of the list. Also if there are unread comments then you can just click on the link and jump to the first new comment.

This is a great feature and it's also useful for seeing which older articles are still attracting interest. I don't even bother to go to the homepage any more.


Blog: Ambling Randomly
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Jon1958 15th Nov '14 44 of 44

Just watched the web cast of the Flybe web site (if I was more technically adept I would include a link)
Long but worth a watch. FWIW here are my thoughts
1. Impressive management with a clear vision
2. Business model of an airline providing regional connectivity makes sense
3. UK business growing and clear direction
4. Disposing of the Finnair business made sense
5. Legacy issue of EU261 ruling now provided for and should be less of an issue going forward (as I understand it there is a right to compensation of GBP 250 for any flight delay of more that 3 hours - quite an exposure if you are selling tickets at a third or less of that price - the court ruling means that claims can now be brought going back 6 years and that is now fully provided for going forward there should be less exposure with newer planes etc
6. Disposal of unwanted jet aircraft is the outstanding legacy issues - they are uneconomic for Flybe's routes for which turbo prop is the way to go - 5 out of 14 jets have gone and 9 are still to be sold.
So I am a happy holder

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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