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First Derivatives - is this a smoking gun?

By Tom Winnifrith, The Sheriff of AIM | Saturday 6 October 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Matt Earl has already done valuable work on First Derivatives (FDP). But is there a smoking gun? Let's rewind sixteen years...2002 was a tough year to launch a tech IPO.  

How did First Derivatives manage to get its IPO away?  A micro-cap technology company in the worst market for tech in history…  Younger readers may not remember that time, but it was cold: It was the technology sector’s nuclear winter.

Brian Conlon raised £1,148,000 through the issue of new shares at 50p, capitalising the company at a little over £6,000,000.  The broker was JM Finn of 3DM infamy, now Finncap. Good job.

No doubt their efforts were helped by the EIS status of the round,  but the company was only a few years old and had under £2 million of revenues.  On a c3x multiple of trailing sales and perhaps c10x trailing reported EBIT, one can perhaps see how they pulled it off.

However, the reported revenues, profits and book value from around that time are heavily dependent upon how one views a series of related party transactions with a company called e-hub.com.  This seems to have been another start up technology firm from Northern Ireland.

A few important notes to show how “related” these companies were:

  • The board and investors overlapped with First Derivatives.

  • Brian Conlon was a significant investor in both companies and described as “Managing Director” of e-hub.com in the FD accounts.

  • Mr Michael Chicken was a senior director in both.

  • Signatures on the financial accounts indicate the same individual, from KPMG’s Belfast office, acted as auditor.  The signature may have just been some junior at the time? Still, KPMG Belfast acted for both companies.

FD’s financial accounts to March 2002

E-hub.com’s financial accounts for 2003.

In the 2002FY financial accounts (for the year to March 2002 and the first after the completion of the IPO), FD recorded sales of £202,000 from e-hub.com and had receivables of £536,000 from the same company:

“Brian Conlon is the managing director and shareholder of e-hub.com plc.  During the period the company traded with e-hub.com on a normal commercial basis resulting in sales of £202,000(2001: £458,000).  The amount due by e-hub.com plc to the company at 28 February 2002 amounted to £536,000.”  Note 21 from First Derivative’s financial accounts for the 12 month period to February 2002.


From FD’s 2002FY accounts

Note:  £458,000 of revenue in 2001 represented 25% of FD’s total revenues for that year, and that was the year prior to the IPO, and so presumably formed an important part of the investment case.

FD reported about £600,000 of operating income in 2001.  Question for the reader: What would have FD’s operating profit have looked like if the £458,000 of 2001 revenue from e-hub.com was impaired to zero owing to non-payment?  I think FD’s resulting profits would have been reduced by about 75%...

The extract above is also interesting with regards to the following statement:

“It is considered by the directors that whilst there is some uncertainty regarding the timing of the repayment of this debt, there is no significant uncertainty regarding its ultimate recoverability.”

That’s a really interest conclusion by the Directors because it looks like e-hub.com had significant problems at that same point in time.  It looks like it was being kept alive by its own Directors, including Brian Conlon. From Note 1 of the e-hub.com financial results in 2001:

Interestingly, as an aside, KPMG had qualified the accounts for e-hub.com.  


So, at the time of the IPO, a significant proportion of FD’s book value and reported revenue was dependent upon a company for which the FD directors were instrumental in keeping afloat.  E-hub.com had negative net current assets at that point in time:


FD’s 2003 FY accounts show a further £228,000 of sales from e-hub.com, but this time with no resulting outstanding receivables.  In other words, the debtor balance had been settled… but not by e-hub.com paying FD any cash. During the year, FD had purchased “a software asset” for £900,000, £550,000 of which seems to have been offset against the trade credit.  This transaction was meant to result in up to a further £1.1m of further consideration, due if the software was of any use:

“During the year the company purchased a software asset from e-hub.com plc for a minimum consideration of £900,000.  Of this total consideration £550,000 was offset against a debtor balance owned by e-hub.com plc. Additional consideration will be paid, at a rate of 20% of future sales of the software to e-hub.com plc up to a maximum further £1,100,000.”

From FD’s 2003FY accounts


The amount paid to e-hub.com subsequently, under the “additional consideration at a rate of 20%”, amounted to precisely “£Nil”.  This can be seen in the Related Party Transactions notes of the subsequent financial accounts of 2004FY and 2005FY.

From FD’s 2004FY accounts.


From FD’s 2005FY accounts.

The software, purchased for £900,000 from Mr Conlon’s other investee company, seems to have been entirely non-commercial.  Doesn’t this seem odd? How is it that FD’s board of directors, who would seem to have had an intimate knowledge of e-hub.com’s business, could choose to pay £900,000 for its IP and subsequently find it to be worthless?

Summary of events:

  • E-hub.com was a major customer of FD in the run up and during First Derivative’s IPO.

  • E-hub.com shared common active investors and directors with FD.

  • E-hub.com shared the same auditor as FD.

  • The revenues of E-hub.com seem to be largely accrued on FD’s balance sheet but represent a large proportion of the reported revenue, profits, and book value.

  • FD Directors claimed that there was no significant risk to the money not being received from e-hub.com, even though e-hub.com was clearly in financial trouble and was being kept alive by the directors/shareholders, including Brian Conlon.

  • FD, after raising money from its own IPO, buys an intangible asset from E-hub.com for cash and an offset against the receivables built up through “normal commercial trading”.

  • The intangible asset seems to have been non-commercial.

This only relates to a few hundred thousand pounds: not much in the context of today’s billion-pound market cap.  However, in the year prior to the IPO, about a quarter of the company’s revenues related to trade undertaken with e-hub.com (see the AIM admission document), much of which seems to have been accrued and subsequently capitalised through the transaction in which FD purchased what turned out to be a non-commercial intangible asset.

Has anyone ever heard of the phrase, “pig and a pork”?

Some of the £900,000 seems to have been a real cash transfer from FD to e-hub.com, which raises the question as to where the cash might have ended up.

E-hub.com, at around about that time, owed Mr Conlon some money, as he had been helping it financially:

From e-hub.com’s financial accounts for the period from March 2001 to May 2002

Did he receive any of the funds from First Derivatives?

Conclusion: you may say this is small in today's terms and that it is a long time ago. It is and it was. But this curious arrangement was the basis of the entire IPO valuation. It looks very odd to me and is something that I shall now be asking regulators to look into. 

Better still... there are more curious deals to flag up. This is just the start!


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