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Tern – a few attacks of amnesia ref Companies House and those warrants

By Nigel Somerville, the Deputy Sheriff of AIM | Sunday 27 September 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.

Tern’s  (TERN) jewel-in-the-crown investee company, Cryptosoft, appointed a new Company Secretary on 24 July this year in the form of Gravitas Company Secretarial Services Ltd. They seem to have had their work cut out, as we shall see. But in the process of filing various amendments to Companies House a few questions are thrown up over Tern’s investment into Cryptosoft. And then it is back (yawn, yawn) to those pesky warrants where is starts to look as though the giveaway was less accidental than first appeared.

AIM-listed investment company Tern (TERN) first announced its acquisition of Cryptosoft back in September 2014 – just over a year ago. Tern had just bought out the ‘A’-shares which accounted for 95% of the share capital, although only accounted for 75% of the beneficial interest at the time, with the remaining 25% held in the form of ‘B’-shares by the (now former) CEO of Cryptosoft and other employees. Except that when Cryptosoft filed its Annual Return to Companies House for the period to 19 Feb 2015 it appeared as though the only holder of the ‘B’-shares was the (now former) CEO. (Just to be clear here, he is still with Cryptosoft).

So the statement in the acquisition RNS appeared to be incorrect. Except that we have now had a resubmission of that Annual Return which shows that there were indeed a couple of other holders of the B-shares, as they were transferred on the same day as the A-shares were sold to Tern plc. A spot of amnesia, then?

Also in that original acquisition RNS was a statement that Tern was to invest £300,000 into Cryptosoft. But it was not until 22 July that Cryptosoft filed an allotment of shares to Companies House - and there were three lots of shares issued. Except that there has now been a replacement filing for that too – the issue of 300 B-shares appears to have been forgotten about. More amnesia.

What we find in the (amended) filing is that on 22 July 2015 900 A shares were issued at £333.3333 a pop – which adds up to £300,000. But at the same time 3,000,000 A shares were issues at just one third of a penny, which adds up to £10,000.  All rather odd: does the board of Tern think that each of the A-shares is worth one third of a penny, or one third of a grand? That implies a valuation for Cryptosoft ranging from just over a thousand pounds up to (ludicrously) over a billion pounds!

It was announced by Tern on 30 March this year that additional funding on top of the original £300,000 would be provided to Cryptosoft in the form of a subscription of £10,000 for new A-shares and another £390,000 in the form of a secured loan. So one would conclude that the issue of 3,000,000 shares for £10,000 in the re-submitted July allotment filing is explained by that.

But what about the £300,000 paid for just 900 A-shares? Is this the very same £300,000 that Tern promised to invest into Cryptosoft, as announced in the acquisition RNS dating all the way back to September last year? The thing is that in the FY14 Annual Report we see that Cryptosoft is held on the balance sheet at a little over £300,000 – being the cost of acquisition (paid for in Tern shares to the former owner) and the £300,000 investment into the company. But we also see that £100,000 is shown in payables as money being due to Cryptosoft. So did Tern shove £200,000 into its investee company during 2014 with a further £100,000 still to pay? If so, was it a loan or an investment? Was it a subscription for shares which were not issued until the following July? Did someone forget to issue the shares, and someone else forgot to check that they had arrived? Two further attacks of amnesia?

Then we have Angus Forrest’s telephone interview with Proactive in which he claims that Cryptosoft is wholly owned by Tern. Really? Or did He just forget that the B-shares existed?

And talking of forgetting, I have a minor attack of amnesia to ‘fess up to as well: I forgot about a small statement in Tern’s FY14 Annual Report. This is with reference to the warrant mystery – whereby the company’s joint broker, Peterhouse Corporate Finance, exercised a bunch of warrants at 0.02p when two annual reports and an RNS had described them as being exercisable at 4.6p (or the equivalent thereof, ahead of a capital reorganisation).

We have been told by RNS that the exercise at 0.02p was correct, because there was a second (previously undisclosed) mechanism for the exercise which involved fewer shares and a lower exercise price. I wondered whether this meant that the previous management of the company (when it was still called Silvermere, under Frank Moxon) had got it wrong and the error had not come to light until Peterhouse came to exercise the warrant.

The warrant instrument allowed Peterhouse to get 1.5% of the existing number of shares at 4.6p over a period of three years from date of issue (back in 2012). As Tern issued more and more confetti, the number of shares which Peterhouse could get through this increased. But in the FY14 Annual Report there is a little statement in note 19 to the accounts which states that it has been agreed that no further warrants will be issued.

Now it is very rare in life to discover that you get something for nothing. Peterhouse agreed not to get any further warrants as Tern continued issuing shares. But at what price? We are not told of any variation to the terms of the warrant instrument other than the statement above. But was the price of Peterhouse letting go of any further warrants that this new exercise price of 0.02p came about?

If that is the case, then it would seem that Tern’s board also suffered a spot of amnesia when it came to doing the Annual Report.   

I note that since Lucian Miers recommended a sell at 26.5p, Tern’s share price has been slipping somewhat. Have they fallen enough for me to turn bullish? Would I buy the shares?

Forget it!

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  1. Errr.. Quick Guess. That might be one of those Garbage In <abused in the middle but works to advantage> Garbage Out… Thangs := PROFIT!!1!!

    Thanks for the #CODE Review.

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