What on Earth(port) is going on?

There seems to be a spike in activity on Earthport over the last few days. Bulletin boards and chat rooms from FT Alphaville to ADVFN are abuzz once more, perhaps hoping, just hoping, that both the battered longs and shorts could magically find a way to recover some of their losses. While the real reason will remain unknown (soon be consigned to oblivion), the only notable event is the unusual spike in price from 20p to 27p on the back of significant buy volume (significant enough for EPO, anyway) at the end of last week.

Regardless of my background in astrophysics, it doesn't take a rocket scientist to decipher the appaling financial state of the company from their recently outed figures.

The method to my madness involves creating 3 lists, which I then stare at for hours: Facts, Research and Rumours.

Let's apply this to Earthport:

FACTS

• Revenue - The company has just reported one of its worst years in its rocky history. Turnover of £1.5 million. In terms of quantum, it generates revenue that rivals a cornershop down the road. In case you were wondering, Mr Patel hasn't listed on AIM - yet!


• Expenses - Executive compensation has gone from £2 million to £4 million. None of this is attributed to administrative staff. In other words, the board felt they were doing a phenomenal job, gave themselves a pat on the back and a 100% raise.


• Auditor's Report - This is what the accountants (Baker Tilly) have written:
  "the disclosure made in note 2 to the financial statements explaining that the financial statements have been prepared on an ongoing basis, the validity of which depends on the Company’s and Group’s ability to generate sufficient cash flows to finance current and future liabilities as they full due. We have been unable to obtain sufficient evidence that the Company and Group will be able to generate sufficient cash flows to finance these liabilities............Because of the potential significance, to the financial statements, of the matter referred to in the paragraph above, we are unable to form an opinion as to whether:
  • the financial statements give a true and fair view of the state of the Group’s and the parent Company’s affairs at as 30 June 2009 and of the Group’s loss for the year then ended;
  • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
  • the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies act 2006; and
  • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006."
English: The auditor's don't think Earthport can pay their bills (ie. no cash). Also, they aren't willing to confirm that the financials are accurate or that required accountancy protocols were followed by the company. Pretty grim, wouldn't you say?

• Valuation - The current share price represents a valuation of approximately 20x revenue. For a company that has never in its history turned a profit, burns through nearly £500k per month and has no cash left - can someone please spell O-V-E-R-V-A-L-U-E-D?

• Investors - 50% of the company is owned by institutions like Schroders, 25% by insiders and the rest by the public. Andy Brough of Schroders went on record a couple of months ago expressing his displeasure with the board's disproportionate time spent trying to pimp the business rather than run it. Andy's no fool, and as an 11% shareholder in the company, he could see the bid search amounting to naught and sales suffering in the meantime - We all now know how that story ended... All I can say now is: Andy, you da man! By the way, where are you hiding? Call me. Let's do lunch sometime.

RESEARCH

• Company History - Earthport is an 11 year old company. It has never made a profit in its trading history. They have had at least 3 board changes since inception due to various allegations, incompetence being the most politically correct one. The company calls itself a money transfer/remittance service provider. Technically, they don't 'transfer' any money. They have accounts with different banks around the world in their name (akin to solictors' client accounts). You deposit your own funds in one of their bank accounts. They then give you a software that allows you to debit your own funds from any of their accounts around the world. Eg you deposit $100 in the Earthport account in Citibank, New York. You can then 'access' an equivalent amount in another currency, if you wish, at another EPO bank account (with NAB in Australia) and have someone collect the money in Sydney in local currency. It's a good idea, but not as unique as they make it out to be. Barrier to entry is low, limited only by a competitor's ability to open several bank accounts and have a float in each one. They repeatedly talk about organizations like Standard Chartered being their 'partners'. They are not. Earthport has accounts with several Standard Chartered branches. That's it. It's like me claiming that HSBC is my 'partner', just because I have a current account at my local HSBC branch.


• Board History - It was mentioned recently that the chairman, Mike Harrison, used to be the chairman at another AIM boom-and-bust tech story called Cedar Group plc. I googled it and spent a good couple of hours reading up on it, including press coverage leading up to the bust. All I can say is that the CED and EPO stories are eerily similar. All sorts of serious allegations like fraud were bandied about at the time. From what I could gather, the stock went as high as about 350p and then crashed to about 3p. All the same ingredients such as a strategic review, pumped up bid rumours, huge losses, no cash in the bank, etc existed then, as they do now with EPO. The background on James Bergman (CEO) is rather dull in comparison. He is about 30 years old. Worked for a software company. Then worked for an investment advisory called ZAN Partners in London as a salesman earning £60k per annum when he almost got fired. I guess, he was at the right place at the right time (a few creative strokes to his CV notwithstanding) and now he earns £250,000 a year as CEO of Earthport. One of the non-exec directors is a chap called Lance Brown, who is also a director of Standard Chartered's operation in China. This fact in itself, raises an interesting suspicion about Standard Chartered ever being a potential bidder for Earthport - rules governing conflict of interest and/or insider trading would've forced Brown to step down from the Earthport board at the very incling of such a potential bid. That was never raised or discussed, leading me to believe that Standard Chartered was never on the radar screen as a bidder. Which in turn begged the question, what about the other so called 'bidders'. In hindsight, we all now know there weren't any. But just for grins, spend a few minutes browsing through the archive of press releases by Earthport since the end of June this year. Quite amusing how absolutely nothing could be made to look like a whole lot of something.

• Structure - Earthport has been talking a lot about their Dubai based Middle East operation in terms of sales and growth. The mystical potion that will bring EPO back from the dead. Yet, on their annual report, they list all subsidiaries of Earthport plc and....yes....you guessed it....'Earthport Middle East' isn't even listed as a partly or wholly owned subsidiary of the mothership! Odd. Very odd. (more on this in the 'Rumour' section below).

• PR - This is the most interesting, as it is a case study in creativity. I have gone through all of Earthport's press releases dating back 24 months. There is no positive press release that has come to fruition - not a single one! Whether it be the implementation agreement with a large customer, or a un-named middle eastern partner who paid them £2 million to jump into bed with them; none of these events ever materialised. In fact, the middle east mystery partner ended up stiffing them. Interestingly, EPO's well oiled PR machine either thought it was insignificant or wanted to break the news to shareholders bundled with some more positive news, in order to ease the pain. The announcement was finally made a couple of weeks ago, tucked away as part of the 50 page prelim results. Now, the audited annual report isn't important enough to make the newsreel on their homepage. It was immediately pushed away to the investor relations/annual report section, completely bypassing the homepage. One could argue that the homepage newsreel had far more pressing news to disseminate - for example, how EPO execs recenlty got drunk on free wine at a party for 'payment movers and shakers' - No. I''m not being sarcastic. Honest. Check it out for yourself: http://www.earthport.com/
  

RUMOURS

• The recent loan of £1 million has not been subscribed to. Supposedly, the mystery investor has had second thoughts. (Funny how EPO seems to not have a problem finding mysterious characters to call on in times of need)


• The company has only £140k cash left in the bank, representing a couple of weeks of running expenses.


• The office in the Middle East is based in sun drenched Dubai. Allegedly, this office, which contributes significantly to Earthport's global operation, is nothing more than a small 2-man serviced office in 'Dubai Internet City'. In fact, it is so small that they're not even listed on the Internet City's website. http://www.dic.ae/partner_directory/. (This rumour may well be upgraded to FACT soon - I am waiting for further verification regarding the setup)


• The board is desperately negotiating with 'high net worth' individuals for a much needed cash injection. The disturbing part of this rumour relates to the origin of the money. Let's face it, the EPO board doesn't seem to be good at much these days, so why would it be any different when it comes to due diligence. Given how desperate they are, the due diligence bar is rumoured to have been lowered.

Given the above, I have little doubt that the recent share price spike is manipulation. Furthermore, we may see more such spikes if indeed they do get a much needed injection of money.

But the real head-scratcher here is: where are the institutions that own 50% of Earthport? Surely they know the FACTS, RESEARCH and RUMOURS, much better, and in far more detail, than you and I. But their silence is deafening. The longer they remain silent, the more one would begin to suspect their collusive involvement in some or all of the above oddities.

Trombone Disclaimer: I urge everyone to verify the above independently. If there are any confirmed inaccuracies, please post them here as soon as possible for all to benefit.