By Nigel Somerville, The Deputy Sheriff of AIM | Sunday 9 August 2015
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.
Phew - what a ride! One moment share of Tern plc (TERN) are drifting at around 6.5p a share and then in the blink of an eye they have rocketed to 15.75p, having peaked at a whopping 27p. Ahead of Wednesday’s interims which showed a balance sheet of just £1.2 million, the Tern rocket had ascended to about 15p a share to value the company at around £7 million. They slipped a little on release of the RNS before a paid-for interview with company chairman Angus Forrest on Proactive Investors ignited the booster rockets and off we went again, up into the clear blue skies above, notching up a peak of 27p (market cap £12.3 million), and a four-fold re-rating. Post-excitement slippage then saw the shares close a wild week at 15.75p, a market cap of £7.2 million. What was all the excitement about?
Of course, this is all about investee company Cryptosoft which has recently appointed Mr Darron Anthill as CEO. We have had news of a tie-up with ThingWorx (although no financials have been released) after Cryptosoft’s newly improved security platform had been formally launched. Mind you, for all the fireworks of last week, Cryptosoft remains pre-revenue. Tern has announced funding of £700,000 in total to fund the jewel in its crown although the actual funding delivered thus far looks to be of the order of £375,000. Never mind all that, Tern appears to be the talk of the town down at bulletin board central, where commercial success for Cryptosoft seems to be a given. I think that is a dangerous assumption to make.
Tom Winnifrith has highlighted the current penchant of the market for giving sky-high valuations to pre-revenue technology companies. I would suggest that Tern is a case in point. Its interim balance sheet showed net assets of £1.2 million. First half revenues of £60,000 are recorded, although this looks to have got only as far as the receivables column rather than cash in the bank. It would also appear that these revenues are simply fees and charges levied by Tern on its investee company, Cryptosoft, paid for out of the cash that Tern is investing into it. Out of approx. £375,000 pumped into Cryptosoft since last autumn, it seems that £96,000 has been booked back out again in fees. All a bit of a merry-go-round, but which conveniently swells Tern’s balance sheet.
At the peak, this investment company with a £1.2 million balance sheet was somehow worth £12.3 million. In fact £300,000 of convertible director loans which are expected to be converted in due course at 1.25p (£270,000) into 21.6 million shares, and 2.016p (£30,000) into c. 1.5 million shares on top of the now existing c. 45 million shares. That would imply a resulting balance sheet of about £1.5 million and a peak market cap of £18.6 million.
Then, of course, Tern does not own all of Cryptosoft. It may control the voting rights, but Cryptosoft is being held with the intention of a sale in due course. In that circumstance Tern gets 75% of the proceeds – plus, one assumes, repayment of outstanding sums currently being loaned. Cryptosoft is held on the balance sheet at around £375,000. Yet an implied peak market cap for Tern of around £18.6m would suggest that the market is assigning £17.7m of that to 75% of Cryptosoft, which in turn implies a valuation for Cryptosoft, in its currently pre-revenue state, of around £23.6 million. Do the same type of maths on last week’s closing price of 15.75p and you still see an implied valuation for Cryptosoft of about £13 million after taking director convertibles and the 75% into account.
Surely there was something in the interims for us to get excited about, then? In the highlights are told all investments making good progress and that investments made in 2013 and 2014 are growing strongly, creating value and buyer interest on the route to realisation. No mention of revenues, though!
Perhaps the update in Mr Forrest’s Chairman’s Statement on flagship investment Cryptosoft contained some meat on the bone? It was revealed that Cryptosoft was discussing major contract opportunities with potential UK and US customers. Well I guess that Tom Winnifrith could tweet Cheryl Cole and then say that he is discussing major opportunities there. Mr Forrest continues that Cryptosoft continues to attract significant interest. Well it certainly does on the bulletin boards. But where is the revenue? Where is the contract which gives some forward visibility of earnings?
I also note the use of the word ‘claims’ here:
Cryptosoft claims to be the only supplier with a peer reviewed, market proven software security product, for IoT (‘Internet of Things’) and M2M (‘Machine to Machine’) applications that is hardware, software and security system agnostic and which can support legacy and future installations.
So is there a competitor out there or not? Why was that word ‘claims’ in there, in a statement which was signed off by Nomad WH Ireland?
And that brings us to the Proactive interview, the release of which saw the explosive rise to 27p as the bulletin boards were all of a lather about what Mr Forrest had to say. But why, then, was Mr Forrest not causing the same levels of excitement in his Chairman’s Statement, released the same day as the interview, which was Nomad-approved? Of course, the interview was not signed off by WH Ireland. People might just want to think about that.
Mr Forest continues that Tern's balance sheet remains unleveraged with the investments financed by equity and healthy level of current assets. Hmm, ‘unleveraged’ – that is apart from £300,000 of director loans, and an unexplained £18,855 addition to non-current liabilities. And then there is the ‘healthy level of net assets’. Healthy enough to pay all the bills, then, you might think. But no! Cash and cash equivalents sit at £335,912. Add on receivables of £85,668 and take off payables of £61,797 and we have net current assets of £359,783. Tern is committed to a funding package of £400,000 for Cryptosoft, on top of the previously announced £300,000. It looks as though the latter has now been paid (there was £100,000 outstanding as at FY14) and it seems that £75,000 of this loan package has been delivered, so another £325,000 remains earmarked for Cryptosoft. That leaves about £35,000 to cover all other expenses, such as Administrative costs which totalled £161,654 for the whole of 2014, but were already £130,734 at the half year this year. It is clear that more funds will have to be raised before very long.
Perhaps that partly explains why the shares dropped heavily from a peak of 27p on Thursday to close at 15.75p on Friday. One might imagine a bout of profit-taking by investors, who would have been sorely tempted by a four-fold rise, but at 27p a share if I were Angus Forrest I’d have been straight on the blower to my Brokers at WH Ireland and Peterhouse to get a placing away pronto.
And then, after-hours on Friday when everyone had gone home for the weekend, we had a Holdings in Company RNS: Hargreave Hale had been selling again, offloading another 850,000 shares (about 2% of the company). The last notification from Hargreave Hale was back in April and they have quietly offloaded 350,000 shares in between times. Since picking up 9,050,000 shares late last year, Hargreave Hale has steadily offloaded since January and is now down to 5,100,000 shares.
Hargreave Hale started selling after a series of revelations on ShareProphets back in January which showed that the company had been, cough, mistaken in a few RNS announcements and had raised money on the back of a share price spike caused by a spurious report that Cryptosoft had been valued at $75m (it had not) – a rise which Tern responded to by saying there were currently no other developments it wished or needed to bring to the attention of the market at that time. But Tern still went ahead and did a placing.
Hargreave Hale started selling within days of our revelations and has been selling ever since. It would seem obvious that this latest dumping of about 2% of the company in a single day indicates that Hargreave Hale thinks Tern is overvalued.
So do I.
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