The Business Phone Limited - the long game?

Scambreaker

A relative of mine has invested in the following company, about which I have many concerns: The Business Phone Limited, company number 06019400.

The company claims to be developing a micro-transaction payment system for sub-saharan Africa. It has been running since 2007, and has had 15 directors since then. There are currently 4 directors. They have acquired funds from around 240 private share investors for a total of £12M over this period.

In the 2015 accounts, the balance sheet does not look healthy. The company has a net worth of -£80k, owes debtors £113k, and appears to have spent all the £12M of shareholder investment, leaving it with a computer or two in a rented office. There is no indication from the abbreviated accounts that there are any employees, and no remuneration is shown for directors. Yet the absence of any remaining substantial tangible assets leads me to think that the vast majority of the invested money has indeed gone to pay the directors.

Surely, a plan to develop a mobile phone based micro transaction payment system, requires a large investment in back end hardware, mobile phone software or apps, and technology partners to facilitate all this. A network rather like this has already been implemented in the same African target markets by M-Pesa...

Furthermore, the audit report states that there is concern about the company being a going concern.

The company is currently on a big drive for further investment by shareholders, on the promise of being able to "deliver" on their system for contracts with Ecobank and Coca Cola. But I really do not believe that a giant like Coca Cola would entertain a company like The Business Phone that appears to have no assets, no software, and ultimately, no product.

I am hoping for the sake of my relative that I am wrong. However, when I look at the numbers, the alarm bells just will not stop ringing. I know there is a lot of financial expertise on this forum. Please would someone have a look at their accounts and make a more informed assessment.

brendon

What are the circumstances of your relatives investment? Did he do any due diligence? The fact that it involves 240 private share holders investing small amounts looks a bit alarming.

masonic

There really isn't any need to look into the accounts to know that this is very high risk. Unless your relative is investing in this company as just one small part of a large portfolio of shares then this is a quite a gamble. They could potentially lose all of the money they invested, which is true of an investment in any individual share, but far more likely with a small company in a niche market.

bowlhead99

They own three other companies which are being carried at a nominal value, presumably as they don't have any real income or valuable tangible assets in excess of their liabilities, or at least they didn't a year ago.

A glance at companies house shows that over the last year they have continued to allot more shares for more than the nominal value which stacks up with the statement that they would intend to continue as a going concern by getting more finance. The accounts aren't published in real time so who knows what the financial position is today.

No real point in speculating. If it's your relative with the investment, why aren't they doing their own cursory research instead of you asking us to do it? It's not a public listed company so they don't have to announce stuff to the market- there is no "market" for the shares - other than publishing the legally minimum required accounts.

You can probably assume that if you offer to bankroll them or take them over they will reveal more about their status and strategy. If you don't, and they don't need you as a financier or need your vote as a shareholder, they have no real practical obligation to do anything other than treat your shareholder rights fairly(ish) in line with their corporate documents.

redpete

Didn't your relative see this as a speculative and risky investment in the first place? If so, why be surprised if the gamble didn't pay off? If not, why not?

Scambreaker

Thank you all for your replies so far.

@brendon

My relative has made other risky investments before, and knows the score. I think the investment was originally promoted by a broker for VCTs. I believe he has invested somewhere between £5k and £15k, but I can’t be sure.

@masonic

Luckily it is a small part of his portfolio.

@bowlhead99

Yes, the company is continuing to attract upwards of £500k per year in investment in new shares, primarily from existing shareholders. There is a clear lack of evidence that they have any product ready for their specified market. At their meetings and in their communications to shareholders, they always give reasons why a contract has not been fulfilled by their so called partners, or that they are on the verge of another breakthrough. This suggests that attracting more investment “on the promise of” future business is their only current business model.

@all

Absolutely, my relative did see this as a gamble. However, when the company continued to request further investment after so many years without generating any revenue, I thought it was time to really question the value of further participation. When I showed my relative the M-Pesa system, the local existing competition in their target market, he could see that The Business Phone was up against a system that was already heavily embedded in several African countries. This appears to have temporarily deterred him from further investment. However, I was also hoping to discover a financial irregularity, or at least an accounting method that went against common practice. After all, there has to be something very wrong with a business whose sole purpose may be to attract investment in order to pay its directors a (large) salary - would that not in fact be fraud?

Malthusian

If your relative "knows the score" and has only invested a small part of his funds in this venture then I really can't see the problem. It's a small start up, he would have known that there is a very high possibility of losing all his money. To make any money out of investing in companies at this stage of their development, you have to invest in numerous such companies - some, probably most, will collapse, a small fraction will become a huge success and return your investment many times over, and make up for the duds.

Your posts give me no reason to believe that your relative doesn't understand this. You said he's not invested further money and he's presumably happy to write off his previous investment. If the other shareholders want to throw good money after bad that's their problem.

It's not a crime to run a startup business incompetently, to fail to achieve your vision and pay yourself a large salary while doing so. It may be fraud if there was never any intention of launching a microtransaction payment system, but you need very strong evidence to allege that (let alone get the police interested and prove it in court) and you haven't given us any.

If the shareholders were concerned about the amount the directors were paying themselves then they should have stepped in earlier and either renegotiated the salary package or removed the directors.

If the directors have managed to remove money from the company without authority or business reasons for doing so then again that may be fraud, but again you need evidence.

Scambreaker

@Malthusian

Thank you for your excellent comments.

I have been unable to determine precisely how much the directors paid themselves. However there is evidence that they may have used the majority of investors' funds to pay themselves rather than to develop the business. The balance sheet shows shareholder funds of £11.8M, a sundry reserve account of £-5.6M and a profit and loss account of £-6.2M. They have no tangible assets and they actually owe money to some suppliers. There are no employees or salaries listed in their abbreviated accounts. In their meetings and documentation they have been very lean on details about the infrastructure and software they have or would need for a mobile micro transaction system. They even admitted at a meeting last year that they only had one "IT man" who was working on their software.

Now I am willing to admit that they have had some real costs: travelling to the so called partners, cultivating a few agents in their target market countries, and that they may in the past have had to pay some contractors. After all, there are photographs of half a dozen friendly faces from these countries in their documentation. These costs may have eaten into the £11.8M of investors' capital. But why are there no telecom partners, retail network clients, smartphone apps, or backend hardware and software? At the very least, they should be able to demo a micro transaction on a smartphone with just this financial year's £500k of investor capital.

Even if you discount the theory that the company may only be a vehicle for the enrichment of the directors, and argue that this sum of money might have been enough for them to succeed at starting up this type of business on the ground (debatable), the company has simply missed the boat.

If you go to Kenya, one of The Business Phone's target markets, M-Pesa signs over retail outlets are almost as ubiquitous as Coca Cola signs.

But that is not what the directors would have you believe at their shareholder meetings. They appear to be expert at marketing fluff, and the postponement of satisfactory responses to questions.

You are absolutely right that shareholders should have stepped in if they were concerned. I think the fact that they have not done so has something to do with the target demographic of the shareholder base. In this group, if a reputable broker or a friend recommends an investment opportunity, it seems there is a level of trust assumed that transcends due diligence.

redux

It sounds like they should change the name to Very Patient Capital Investments (not to be confused with any investment trust) Ltd

Malthusian

I think the fact that they have not done so has something to do with the target demographic of the shareholder base. In this group, if a reputable broker or a friend recommends an investment opportunity, it seems there is a level of trust assumed that transcends due diligence.

Ah, the old "tight-knit community" line, you get this every time some investment scheme crashes and the person behind it happens to be from an ethnic minority. It's rubbish. Gullibility and greed transcend racial boundaries. Most scams and rubbish investments in the UK are run mostly by white people and sold mostly to white people, but it's got nothing to do with white people forming a tight-knit community who implicitly trust other white people with their money.

Black people don't hand their money to other black people just because they're the same colour, and it's patronising to suggest that they would because they're more trusting and more naive than cynical and sophisticated white folk. They invest in stuff like this for the same reason as everyone else, because they fall for a pitch that's too good to be true.

Scambreaker

I appreciate your analogy, but just for the record, in case anyone thinks otherwise, my reference to a shareholder demographic group had nothing to do with ethnicity. Instead I was thinking about gender, age and income.

In any event, it would appear from the responses thus far that people do share my scepticism about this company. No one thus far has said anything good about the state of their accounts.