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Tern – kicking the tyres

By Nigel Somerville, the Deputy Sheriff of AIM | Friday 5 February 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.

Cynical Bear asked an interesting question about AIM-listed Tern (TERN) and reminded us that we’ve not looked very much at Tern’s investment portfolio beyond its Cryptosoft holding. And so Hi-ho, Hi-ho, to Comp’nies House we go to look at a company called Flexiant. Or, rather, Flexiant Corporation Limited – and its wholly owned subsidiary Flexiant Limited.  

Actually there is something I am simply baffled by. I can’t even say there is anything wrong or that someone is up to no good. But I am baffled as it seems totally illogical to me.

Tern’s investment in Flexiant was (according to Tern’s recently released 2015 Annual Report) valued at £269,270 against an investment cost of £134,635. I’m sure that Flexiant has plenty of potential but looking at its Companies House filings brought me to its last set of accounts, for calendar 2014. These were filed in September 2015 (in good time for the filing deadline at the end of the month). It is good to know that there are some firms out there which file on time. Oh, but oops – the Annual Return to 31 Dec 2015 is marked as overdue (it was due on Thursday of last week). Perhaps it is in the system and has just not been released by Companies House yet.

But it is those accounts I simply don’t understand. First up we have the Dec 2014 accounts of Flexiant Corporation Ltd (the parent). These are abbreviated accounts under the smaller companies regime. I have no problem with that. The accounts are also unaudited – again, that is fine as it is a smaller company. The rules say it is not needed.

Under current assets that we have a debtor to the tune of £12,573,669. That is the only current asset noted, but it does rather swamp the current liabilities of just £156,418 so all’s well.

We see under Note 2 to the accounts that the company’s investments at the Balance Sheet date include a 100% holding in Flexiant Limited. So let’s take a look at those accounts (for the same period).

Here we find that the accounts are again of the abbreviated variety as Flexiant Limited too is small enough to qualify. But in contrast to the parent company, these numbers have been audited – by the good folks of Grant Thornton.

The first thing to catch the eye is that there is an Emphasis of Matter statement regarding Going concern. We are told:

He company incurred a net loss of £3,664,670 during the year ended 31 December 2014 and at that date the company’s liabilities exceeded its total assets by £12,102,255. These conditions, along with other matters….indicate the existence of a material uncertainty….(etc)

Now we might be a little concerned about that but on the other hand the parent could just pump in some more cash, I suppose. After all, Note 1 to the accounts says that the company is dependent on its parent for working capital, and that the parent had agreed to continue to support the company over the following 12 months. And the parent has that current asset of over £12 million, right?

But the thing I don’t understand is sitting in the abbreviated balance sheet – and it is an amount falling due AFTER one year of £12,573,670. For the sake of a £1 rounding error, is this the very same money as the £12,573,669 noted in the parent balance sheet as being a CURRENT asset?

As stated earlier, I would imagine this is all perfectly proper – but I really don’t see how it makes sense that the same amount can be a current asset at one end of the deal, and a non-current asset at the other. Oh to be an accountant…..

Back to the parent accounts – the subsidiary is held on the balance sheet at £1 even though there is a deficit of net assets to the tune of £12,102,255. OK, fine – it is not a current liability. Even though it appears to be a current asset of the parent!

But follow that through to the parent, where we are told that shareholder funds (including that £12,573,669 which is apparently a current asset) total £12,417,252. Clearly if we strip out that debt we are in negative assets.

As I said, I’m sure this is all perfectly within the rules – after all we see the same situation in the FY2013 accounts.

At the last count (the Annual Return to 31 Dec 2014 – since we have not yet been furnished with the 2015 numbers), Tern plc held 50,000 A Ordinary Shares in Flexiant Corporation (out of 5.4 million) which Tern valued at £200,000 as at Dec 2014. That implies that the A-Shares of Flexiant Corporation are worth over £20 million. Then there were B-, C- and D-ordinary shares on top. Whilst we can understand a valuation for the shares based on what someone else has recently paid (and so Tern’s valuation of its Flexiant holding was fine when considered from that perspective, since that original holding was bought at £2 a pop and since then the same class of stock has been sold at £4 a pop) but it does seem to be quite a rich valuation when looking at the balance sheet.

Quite how it looks if you consolidate the balance sheets of parent and subsidiary……

I’m sure all is fine and dandy here. But I don’t think I’ll be rushing out to buy some myself – after all, one should really only invest in something you understand and I don’t understand the accounting.

Nor do I fully understand the valuation.

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  1. Moreover take a look at IAS28 (the Accounting Standard for Investments in Associates and
    Joint Ventures) that clearly states that ‘the Financial Statements of the investor and investee used must not differ by more than 3 months in terms of the reporting date’.

    Tern is 31st December 2015 and Cryptosoft is 30th October 2016.


  2. Nigel Somerville

    The Truth – Tern is, as you say, running its accounting year to 31 Dec.
    But unless I’m missing something or we are talking at cross-purposes I don’t think you are right about Cryptosoft:
    Cryptosoft was running its accounting year to 31 Mar but when Tern bought in it was firstly shortened to 11 Sept (the day before the effective date of the deal) and the relevant accounts for a dormant company were released by Companies House the following April. The accounting period was then extended and so the next set of numbers, to 31 Dec 2015, are due by 30 Sept 2016.

    So as far as I can see the dates do match up.

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