By Nigel Somerville, the Deputy Sheriff of AIM | Sunday 31 January 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.
I indicated in part 1 of my results analysis that there were a few bits and bobs in the Tern (TERN) Annual Report which had not made in into the RNS version of the FY15 results. Often it pays, when studying a company’s numbers, to begin with the notes to the accounts and then work backwards from there. And so here are a few things which caught my eye.
I suppose the first thing which strikes me is that much greater effort seems to have gone in to producing an attractive document this year. A bright techno-picture adorns the front cover, instead of last year’s drab effort which simply told us it was the Annual Report. After the company information (directors, advisers and so on) we then have 18 pages of nice cuddly bed-time reading to make us all feel warm inside before we get to the actual numbers. Last year’s effort offered only twelve pages after the company information page to warm us up before hitting us with cold hard numbers.
Also catching my eye are the important metrics presented. For example in the FY14 report the first table we come to gives figures (with previous year comparatives) for total assets, net assets and net assets per share. This time around that first table gives total and net assets…and the highest shares price achieved. Reading Tom Winnifrith’s 49 Red Flags I note that an obsession with the share price is a bad sign. I think I’d rather know what the shares are worth, not what they were trading at last September.
I’m sure that shareholders will really appreciate the additional time and cost which went into the 2015 Annual Report.
Now for those pesky Notes to the Accounts, starting at the end and working backwards…..
Note 17 – Related Party Transactions
After discussion of convertible director loans we see a series of payments to companies owned by directors of Tern. In previous years Tern had announced that there were no directors’ fees but last year’s annual report made clear that they were on the way.
One of the things worth watching out for on the subject of boardroom pay is where there are directors’ salaries and then we find further fees paid to them in the related party transactions via service companies. Sometimes they refer to the same payments, but sometimes further fees are slipped in this way. In the case of Tern’s 2015 Annual Report we find a total of £45,200 paid out in relation to management services provided via what appear to be service companies. Two out of three numbers here are higher than the “salaries and fees” disclosed in the remuneration report, with one the same. There is a further fee of £25,000 relating to an invoice dating back to 2013 which I shall ignore.
The remuneration report discloses boardroom pay totalling £112,465 which, by AIM standards, is not exactly the stuff of snouts in the trough. Even adding on what looks to be an additional £45,200 from the Related Party disclosures (to make a total of £157,665) it hardly looks extreme. But One might note that none of that is in the results RNS, and shareholders who have not read the full FY15 Accounts may not even be aware that there are now boardroom fees at all.
Just to confuse matters, if we look at Note 5 (Staff Costs) we find wages and salaries of £69,965 and consultancy fees of £42,500 (which add up to the stated remuneration figure of £112,465). We are told here that other than directors the company had no employees. So it would seem that the related party transaction payments are indeed on top of boardroom salaries and fees.
A total boardroom cost of £157,665 (if, indeed it is) is heading for 10% of net assets. Frankly, again by AIM standards, that is not anything to write home about. But add on Nomad and Broker costs, listing fees, the odd PR bill and so on and one quickly sees that even Warren Buffett would struggle to make shareholders a return here. And there are options still to come.
Note 16 – Share Based Payment Charges
A resume of warrants issued to Peterhouse (the broker) and exercised amid some controversy (see HERE) as well as those issued in the process of the acquisition of Tern’s interest in Cryptosoft, and further warrants attached to a placing is given.
We then have a detailed account of 3,000,000 boardroom options issued (mostly at 9p, with a few at 15.25p). All of this is known from RNSs released, but sitting in the midst of it is this:
During the year share options were issued to a professional adviser as part of their fees. Under the advisors scheme options may be granted to purchase shares which must be exercised within five years from the date of grant. The advisor options vest quarterly over the first twelve months.
The total number of adviser options (thus far) disclosed is 250,000, exercisable at 15p (a very long way above NAV per share) – hardly significant one might suppose. Given that expiry is after 16 Dec 2020 we might conclude that they were issued on 16 Dec 2015, but where is the RNS for that? Hey-ho, perhaps I just missed it, or perhaps it was decided that there was no need for one.
One might hope that after the nonsense over the Peterhouse warrants - which were exercisable at 4.6p but in the end (and apparently under an undisclosed second exercise mechanism) a different number of warrants was exercised at just 0.02p – that the exercise price of these adviser options has been fully disclosed.
Note 15 – Borrowings (ie “shareholder” loans)
I say “shareholder” loans because the loans (when made) were director loans, yet have always been described as shareholder loans. Strictly speaking, of course, they were and are but perhaps the title was always a bit disingenuous.
A summary of conversions at 2.016p and 1.25p is given (meaning whopping dilution for those who bought in the market, or took placing stock at prices up to 12p a share) but a repayment of £50,000 of these loans is discussed as follows:
The repayment of £50,000 was made under the terms of a settlement agreement. This is now disputed by the other party. In the event that the £50,000 had to be converted @ 1.25p, Tern plc would receive £50,000 from the other party and issue 4,000,000 ordinary shares.
Now that sounds as though this is a former director in dispute with his former colleagues, which does not sound too happy and perhaps suggests that the departure may not have been entirely happy either. Meanwhile the potential dilutive effect of 4m shares being issued at 1.25p would have a bit of an effect on the 2.7p NAV per share.
Note 6 – Operating Loss
We are told:
Loss from operations has been arrived at after charging (£):
Remuneration of directors 213,806
Bad debt recovery (37,500)
Auditor’s remuneration – Audit services 12,000
So what is this Bad Debt recovery of £37,500? Wind back to an RNS of 7 October 2015 when we were told:
Tern…..is pleased to announce that it has succeeded in a claim which was outstanding prior to its reorganisation in August 2013. The terms of the settlement are as follows:
Tern has received payment of its claim in full of £37,500 and awaits finalisation and payment of the legal costs and expenses it incurred in prosecuting this recovery. The settlement will be accounted for as an extraordinary credit in the accounts of Tern.
Is this the same £37,500? Now let’s look at the Income Statement where we are (in the Annual Report, but not the RNS) referred to Note 6 in the calculation of Operating Loss of £172,427. In the income statement we are given:
Movement in fair value of investments £63,492
Gross Profit £225,992
Administration costs (£298,896)
Share Based payment charge ( £99,523)
Operating Loss (£172,427)
So as far as I can see (if we take Note 6 into account) £37,500 seems to have found its way into one of turnover, movement in fair value of investments, admin costs or share based payment charge. I can’t see how it could be classed as a movement in fair value of investments or a share-based payment charge.
Is it turnover? Well under Note 17 (Related Party Transactions) we see that Cryptosoft was charged £161,363 for management services so I would think it unlikely.
That leaves administration charges which, but for this one-off dollop of cash, would perhaps therefore have come in at £336,396 – about 20% of Net Assets at year-end. As I said earlier, Warren Buffett would struggle to make a return for investors in Tern.
It doesn’t make a huge difference, I suppose. With admin costs such a large % of net assets it would take the most incredible investment performance to see the 2.7p of net assets per share get anywhere near the current share price of almost 14p.
And that is before the remaining director share loans convertible at 1.25p, a possible 4m share issue to a former director also at 1.25p, options at 9p, a few outstanding warrants at 2p, 3p and 4p, further options at 15p and 15.25p and so on.
And it is before a collection of assorted costs and bits and pieces in the back pages of the annual report.
Perhaps that stellar performance will come from Cryptosoft, as the bulls would have it. Maybe Flexiant, Push Technology or Seal Software will bring home the bacon. It seems a big hope, given the gap between net assets of about £1.6 million and the market capitalisation of £8.7 million.
For the time being Tern is, in my view, just too sub-scale – but then I’ve been bearish right from the start. The market is valuing the company at around five times NAV and it is loss-making! With that sort of sentiment behind the company it would take a brave person to go short, but I simply don’t see the value.
What I do see is great value for the directors, advisers and so on – and who is paying that bill?
Never miss a story.
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