By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 8 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.
Following a series of questions HERE, HERE and HERE AIM-listed Tern plc (TERN) has finally clarified how it managed to allow the holder of warrants exercisable at 4.6p to exercise them at 0.02p instead. I’ve lost count of the clarifications and restatements Tern has issued so far this year, but at least we can start to draw a line under this latest one – although yesterday’s RNS would suggest that Tern’s FY13 and FY14 accounts and results RNSs, and the RNS of 31 July 2013 (which announced the issue of the warrant instrument) were all just plain wrong.
To recap: in July 2013 it was announced that a warrant instrument had been issued to a corporate adviser. The effect of the instrument (as announced, and adjusted for capital reorganisations) was that warrants could be converted at 4.6p. This was confirmed in the FY13 and FY14 results RNSs and the audited accounts for those years. Yet on 17 August 2015 Tern announced that the warrant exercise had been conducted at just 0.02p, the nominal value of the shares. Shareholders might have been forgiven for feeling a tad misled.
Last Friday, after hours, Tern obstinately announced that the warrant instrument had been exercised correctly. That, of course, was not the point. The point was that the exercise contradicted the RNS which announced its issue, two audited annual reports and two results RNSs as to the exercise price. It was clear that something had gone wrong somewhere – either in the reporting of the conditions attached to the warrants, or in the exercise of those warrants.
I was pretty sure that the company was telling the truth when it asserted that the warrants had been correctly exercised – especially in the light of the series of corrections and restatements which were forced out by ShareProphets early in the year. But the mystery remained as to how or why it was correct when every other statement on the matter from the company said otherwise. More to the point, anyone buying the shares ahead of the warrant exercise had been told that the warrants were exercisable under one set of conditions, when there was (we are now told) another set of conditions which could apply which resulted in less cash coming into the company.
And so now we know. Tern has given what appears to me to be a pretty fulsome explanation of what happened, and all credit to Chairman Angus Forrest for that. The statement reads:
Further to the announcement of 4 September 2015, Tern Plc ("Tern" or "the Company"), the AIM quoted investment company specialising in the cloud and mobile sector of the IT market, is providing further clarification on the terms of the 588,640 warrants which were exercised on 17 August 2015.
As previously confirmed, the warrants were granted under the terms of a warrant instrument ("the Warrant Instrument") which were summarised in a circular dated 31 July 2013 which, inter alia, stated:
"[the warrant holder] will be issued with a warrant which is exercisable over 1.5 per cent of the Company's Enlarged Share Capital from time to time at the Placing Price for a period of 3 years, as part payment for the introduction of the incoming Investors."
The terms of the Warrant Instrument entitled the warrant holder to exercise warrants representing 1.5% of the Company's then issued share capital at an exercise price of 0.23p, (as adjusted for the share capital reorganisation which took effect on 1 November 2013 under the terms of which 1 new ordinary share of 1p was issued for every 1000 issued shares of 0.001p each and each such new ordinary share was then subdivided into 20 new ordinary shares of 0.02p each). On this basis, the warrant holder would have been entitled to 816,630 new ordinary shares at an exercise price of 4.6p per share. In fact, the Warrant Instrument also conferred on the warrant holder the entitlement to exercise the warrant for a lesser number of shares at the nominal value per share, in accordance with a formula in the Warrant Instrument and based on the average share price for the five business days preceding the date of exercise. On this basis, the warrant holder was entitled to 588,640 new ordinary shares at an exercise price of 0.02p per share.
Tern regrets any confusion and confirms there are no further warrants that are entitled to be exercised under the Warrant Instrument or at the nominal value per share.
And so what appears to be the case is that there were two differing mechanisms by which the warrant instrument could be exercised. The one disclosed was at 4.6p. Until now, the fact that a reduced number of warrants could be exercised at just the nominal price (0.02p) had not been disclosed at all.
I simply have no idea as to why the alternative exercise conditions were not previously disclosed. One would imagine that those alternative terms should have been reported in the RNS way back in July 2013 when the creation of this instrument was announced. But it was not. To be completely fair to Mr Forrest and his Board, and to his Nomad (WH Ireland), none of those responsible for that original RNS are still in post. So I could perfectly imagine that the alternative exercise conditions were not even known to them until the holder came along looking to exercise his rights.
I also warmly welcome the fact that the company has expressed regret over the error. I don’t think I can ever remember a case of an AIM company actually apologising, so this is very significant. It does rather suggest genuine regret and shareholders should take note of that. As much as I would like to heap opprobrium upon all those concerned, that would be wrong. In fact I think that the company has been big enough to say sorry is rather impressive (but it won’t make me a bull of the stock!)
One might ask a question over the adequacy of the Audits for FY13 and FY14, given that the warrant was accounted for under complex ‘Black-Scholes’ calculations for balance sheet purposes. It seems to me that If the Warrant conditions had been verified in audit, none of the confusion would have occurred at all. Is it pie-in-the-sky Utopian nonsense to suggest that this is what audits are for, to check that there is neither fraud nor error in the accounts?
As it is, yesterday’s RNS means that the Audited Accounts for FY13 and FY14 were incorrect – as were the associated RNS announcements – and this might require some degree of restatement. I’m not convinced that the error is material enough to require an urgent restatement, although I do expect to see this dealt with when the FY15 accounts are released.
Why was it such a job extracting this from the company? Is it perhaps because it is a tad embarrassing for it to appear as though the company did not fully comprehend its own capital structure? Is it because two sets of accounts are now acknowledged to be wrong? But at least everyone now knows where they stand. All is clear, and the regret over the matter is also plain.
In this new spirit of openness – Glasnost – perhaps Tern would now care to set an example to it co-members of the Casino by giving investors a full disclosure of directors’ interests in Tern’s investee companies. We’ve looked very carefully at this, and for the avoidance of doubt it is certain that they are under no obligation whatsoever to do so. There is no contravention of AIM Rules or Company Law going on here. But I feel sure that Tern’s investors would welcome this additional level of transparency.
One of the puzzles is that there have been other investment companies which were perfectly open about this sort of issue – Jim Mellon’s Port Erin biotech vehicle springs to mind. There, part of the attraction was that investors could get in on Mr Mellon’s investments alongside him. Surely Tern’s investors would feel the same about the expertise on their own Board and would find it an attraction to know that they are in on something of which a member of the Board is so convinced of that they’ve put their own money into it themselves. It certainly would be a much better gloss to put on things than seeming to be using Tern’s shareholders’ cash to support the investments of directors.
Go on Mr Forrest, set an example for others to follow; be a paragon of virtue: you know it makes sense!
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