Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.
Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences
Cable Car remains short Plus500 with a revised price target of 52 pence (GBP 0.52). Plus500 faces material legal liabilities and has yet to address its undisclosed Belize activities, filings inconsistencies, and misrepresentations regarding customer losses.
Below, I will address the wholly inadequate response from Plus500, which was published in an RNS last Wednesday.
Before I do, however, I have one small mea culpa. In publishing such a large volume of material, I inadvertently neglected to translate Plus500′s stated cash balance of $88 million from USD to GBP. As a result, I published a price target that was too high. Using the updated cash balance of $92.2 million and an exchange rate of 1.53 GBPUSD, Plus500 has approximately GBP 0.52/share of cash on hand today. The per-share lifetime value calculations in Part 3 are similarly expressed in USD and are thus too high by the same factor. Consequently, I now value the cash plus potential earnings from the current customer base at GBP 0.84-0.98. This estimate is based on the potential profitability of the customer base as of Q1 2015 using 2014 ARPU and margins. It does not include remediation costs, reduction in trading activity, or loss of users due to the ongoing account freeze, all of which are likely to be significant.
I regret the error. If any other aspect of this series is factually misrepresentative, I will gladly correct the record.
I continue to believe that if the questions raised in this series are not adequately addressed, the company will ultimately cease to continue as a going concern and hence reiterate the stated cash balance as my price target. In addition, I believe Plus500 will face material legal consequences from its marketing activities, geographic presence, and treatment of customers. More details are in Part 12.
The company’s statement is reproduced below:
The Board is aware of recent press and blog commentary regarding Plus500′s accounting policies and business model and rejects the assertions made as misrepresentative and baseless. The Board reiterates that the Company’s accounts, along with those of its subsidiary, Plus500UK Limited, have received unqualified audit opinions from PwC and the directors are comfortable with the disclosures made therein.
In response to the specific issue raised in respect of the restatement of Plus500UK’s subsidiary accounts and the implication that Group revenue is substantially over-stated or a substantial amount is generated in unlicensed jurisdictions, we clarify that both assertions are incorrect. The application of the new Financial Reporting Standard 102 resulted in the reallocation of gross revenues attributable to Plus500UK’s customers to Plus500 in the Company’s 2014 results. This also required the 2013 results to be restated. The reallocation has no impact on Group consolidated revenue.
While I was hardly expecting a detailed, 10-part follow-up to the questions raised by this series, this response is rather anemic. Plus500 has addressed one concern raised in the report. Now what about all the others?
Notwithstanding PwC’s unqualified audit opinion, I question how the Board could possibly be comfortable with the 15 inconsistent disclosures identified in part 4, which have been forwarded to the FRC for review. Presumably, PwC did not also audit Geostrading, the mysterious Belize-based subsidiary the company has yet to acknowledge. Are the directors also comfortable with the historical operations of that entity? With respect to revenue generated from unlicensed jurisdictions, perhaps the Company could clarify how its purported European revenue in 2010-13 exceeded the gross revenue recorded at Plus500UK, the only licensed subsidiary at the time. Are any members of Plus500′s affiliate program related parties?
The basis for each statement made in this series has been painstakingly documented; I stand behind every assertion and challenge the Board to identify any claim that is baseless. I further pledge to correct any misrepresentation, as noted above.
With regard to the restatement of Plus500UK subsidiary revenues, I speculated in Part 4 that there were several possible reasons for the restatement:
- Revenues at the Group level were overstated.
- The inter-company agreement was modified or terminated.
- The FAS 102 transition (FAS 102 is a modified form of IFRS that replaced a previous UK GAAP standard) required revenues to be reported net of payments to the parent, instead of gross.
The company says that the third explanation, which I suggested was the most charitable possibility, is the case. Very well then. Net revenue presentation in the subsidiary will unfortunately reduce transparency and make it more difficult to reconcile Group revenues going forward, but if that’s what accounting rules require then so be it.
The subsidiary accounts remain somewhat puzzling. PwC’s own summary of the differences among old UK GAAP, FRS 102, and IFRS does not suggest any inventory or financial asset fair value reporting changes that appear to require restating a cost of sales item as an offset to turnover. It is also unclear why the adoption of FRS 102, which did not modify revenue recognition, would result in a switch from gross revenue to net revenue reporting in the first place. The variable treatment of “introductory commissions” is also odd considering the only categories of funds payable to the Parent under the inter-company agreement are 78% of dealing spread revenue above $300,000, 5% of credit card transactions, and the profit/loss on offsetting hedge transactions. Credit card transactions are reported as a separate cost item. Why is the bulk of introductory commission recorded as a reduction in revenue while a portion is recorded as a distribution cost?
In any case, investors will ultimately have to trust that the accountants know what they’re doing here. I’ve highlighted why their work deserves scrutiny.
Additions and amplifications
Brevity is clearly not my strong suit: the latter half of this series received noticeably less traffic than the first few posts. If you’re still with me, there are several very important points raised in the latter half of the series that I would like to emphasize and update.
- In Part 6, I documented the magnitude of revenue reported from customers outside of regulated jurisdictions (line C). The amounts were particularly egregious in 2010-11 when Plus500UK was the only regulated subsidiary, but even in 2013 the extra-legal amount significantly exceeds revenue reported at Plus500AU (approximately $3.2 million). To be clear: $67 million (27%) of the company’s reported revenue from 2010-2013 came from customers in locations where Plus500 did not have legal authorization to operate. This is significantly more than disclosed in the Admission Document and annual filings.
- In 2013, estimated revenues from customers in Europe were also disclosed. They have been added to lines D and E in the table below. Similar geographic disclosures were not made in 2014, so it is no longer possible to track the contribution from unregulated jurisdictions and Europe overall. However, the inconsistency in Plus500′s disclosures remains. For the period from 2010-13, Plus500 claimed European customers generated $40 million more gross revenue than was actually reported by Plus500UK.
- I cannot think of a charitable explanation for this. One or more of the following must be true: Group revenue was overstated, customers in Europe were served by an unregistered subsidiary, or the geographic disclosure deliberately overstated the proportion of revenue generated in regulated jurisdictions.
|Comparison of Group and Plus500UK turnover||2010||2011||2012||2013|
|A. Group reported revenue||24,211||50,028||56,127||115,088|
|B. Plus500UK reported revenue, translated into USD||1,553||28,993||44,692||99,864|
|C = A – B. Revenue generated elsewhere||22,658||21,035||11,435||15,224|
|Plus500UK as % of Group reported revenue||6.4%||58.0%||79.6%||86.8%|
|D. Stated revenue from EEA/Gibraltar customers||18,667||42,874||49,785||103,832|
|E = D – B. Missing revenue from regulated customers||17,114||13,881||5,093||3,968|
- In Part 7, I focused on 10pips.com, an unlicensed Plus500 clone that operated until mid-2010. It turns out it was not the only one. MeVideoCY also operated a very similar site called Omitrade.com from 2009 until at least March 2011. Not only is this site unregistered and undisclosed by the company, but there are several violations of securities advertising rules on the site, such as referring to sign-up bonuses as “free”. How many other unlicensed sites did Plus500 operate? Is Plus500 operating unlicensed websites today?
- A correspondent reminded me that in Part 7, I omitted Norway from the long list of regulatory authorities that have warned against Plus500.
In Part 8, I commented that I have no way to asses the merits of individual claims of unfair treatment on the Plus500 platform. In Part 12, I try to remedy this by investigating some specific allegations of abusive practices and considering the potential consequences in more detail.