By Nigel Somerville, the Deputy Sheriff of AIM | Friday 22 April 2016
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.
Peterhouse, house broker to AIM-listed Tern plc (TERN), yesterday released a note following the announcement of a deal in which Tern’s principal investee company Cryptosoft had acquired the US-based Device Authority Inc in an all-paper deal.
The note offers insight on how the deal values Cryptosoft at £13.6 million after new cash of £1.35 million being pumped into the combined entity, with the net result that Tern’s stake is valued at £7.1 million.
That is quite an uplift on the FY15 valuation and the headline number is certainly impressive. The shares responded yesterday by moving a little higher – just 4.3% - to 12.125p (mid), leaving Tern capitalised at £8.7 million. There are a few buts however…..
Firstly, there are currently 71,922,235 shares in issue. But there remain convertible loans and warrants which offer significant dilution. As at FY15 there were 198,151 warrants at 2p, the same again at 4p and 905,645 at 3p. Then there were convertible loans outstanding of £15,000 at 2.016p (convertible into 744,047 shares), £41,500 convertible at 1.25p into 3,320,000 shares, £55,500 also convertible at 1.25p into 4,440,000 shares and a disputed £50,000 loan which the company claims to have repaid but which could eventually be converted into a further 4,000,000 shares.
That makes for a total of another (up to) 13.8 million shares – which implies a diluted market capitalisation (at 12.125p) of £10.39 million.
If we take the Peterhouse assessment of NAV as being £7.8 million there does seem to be a bit of a gap there.
But the acquisition RNS tells us that the deal values the combined Cryptosoft/Device Authority entity at £13.6 million post new money, but 25% of the value realised on an eventual sale of Cryptosoft goes to its own management, not Tern’s shareholders. So does Tern actually own just 75% of 52.4% (Peterhouse figure) of £13.6 million worth of Cryptosoft? That works out at about £5.3 million.
The warrants, if exercised, would bring in just £39,058. Converting those loans (and assuming that disputed loan is also converted) would bring in £50,000 plus a Black-Scholes adjusted value of the other £112,000 as far as the balance sheet is concerned - not much when compared to the implied £1.7 million increase in market capitalisation.
I have ignored the list of options but one might see a possibility that a further 3.5 million shares being issued via option exercise at prices of between 9p and 15.25p could keep a bit of a lid on the share price too.
One might also note that even Peterhouse tells us that both Cryptosoft and its new bed-fellow of Device Authority offer no visibility on financials or current trading and so the note admits that it is not based on any detailed analysis of the combined entity’s valuation. Oh heck, this is AIM - these are mere details....
There are a few other matters which are unclear, such as how much of the £1 million that we are told that Tern is to invest into the combined entity is actually new money? According to Tern’s FY15 accounts there were unpaid bills of £107,000 owed to Tern by Cryptosoft and a further £619,432 was outstanding on a loan facility.
If Tern really is pumping in another £1 million, one wonders where that is to come from: as at FY15 the company had £278,456 of cash, £359,512 of net current assets (including cash due from Cryptosoft) but had burned through £298,896 in administration costs – around £100,000 every four months, and we are now heading for the end of April. The company raised £1.1 million in February before expenses – so call that about £1 million net – yet according to the Chairman’s Statement in the FY15 accounts Tern is able to look for other investment opportunities.
What with? Is it (yet another) placing ahoy?
Peterhouse makes a glaring error, telling us that As at end FY15 the group had c £0.43m of cash. Sorry fellas, that was as at end FY14. The number you are looking for is just £0.28 million.
Peterhouse also tells us that post FY15 directors converted £85,500 of convertible debt into 6.84 million shares at 1.25p per share, to leave £112,000 of unconverted convertible debt.
But that transaction was reported by RNS on 29 Dec 2015 (HERE), when the market was told that post conversion there would be 62,755,569 shares in issue and £112,000 of convertible debt remaining - the very same numbers as appear in the FY15 accounts. So is Peterhouse saying that the audited FY15 accounts are wrong?
Here we have a house broker note which got its numbers wrong and admits that we have no visibility on financials or current trading. No wonder the shares failed to fly.
As pre-placing ramps go it is a pretty poor effort.
Now then, with Peterhouse claiming that Cryptosoft now accounts for c. 94% of Tern’s portfolio and that Tern retains control over the board, what about THIS from Cynical Bear?
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