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Tern – kicking another tyre

By Nigel Somerville, the Deputy Sheriff of AIM | Sunday 7 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.

AIM-listed investment company Tern currently (to my knowledge) has four investments in its portfolio. Cryptosoft gets the lion’s share of the attention, but the other three (Flexiant, Push Technology and Seal Software) perhaps merit a look. A couple of things struck me as very unusual with Flexiant (HERE) - I did not under the accounting and had difficulty with the valuation but what of the others? Let’s take a peek at Seal Software Group Limited.

Tern’s annual report for FY14 states that the cost of investment was £50,000 and reports an unchanged valuation. The FY15 accounts again state a cost of investment of £50,000 but the valuation has increased to £78,857. We are told that this is based on the price of shares issued in the most recent fundraising.

According to Companies House filings the last fundraising was on 20 November 2015, when 729,492 preferred shares were issued at $0.929281 a pop.

Seal’s Annual Return as at 26 Oct 2014 shows that Tern held 95,716 “further preferred” shares. This is puzzling because a change of share class name or designation filing which is dated 4 Sept 2014 shows that both the Further Preferred Shares and the B Preferred shares were re-designated as Preferred shares, and a share allotment filing also dated 4 Sept 2014 lists only ordinary and preferred stock in the capital statement.

Perhaps there was just a spot of confusion over dates, as the 26 Oct 2014 Annual Return was not filed until 23 Jan 2015 – almost two months late.

But we might assume, therefore, that Tern’s Further Preferred shares had, by the end of its accounting period to 31 Dec 2014, already become Preferred stock.

Seal’s Annual return to 26 Oct 2015 – received for filing by Companies House on 5 Jan 2016 (so a little over a month late) shows Tern holding 95,716 preferred shares.

So given that Tern’s cost of investment was unchanged from its 2014 to its 2015 accounts, we might conclude that therefore at calendar (and Tern’s accounting) 2015 year end there had been no further change in its holding.

Now, back to that share issue by Seal on 20 November 2015 of preferred stock at $0.929281 a share. That is the last share issue by Seal which has been filed at Companies House and thus we might assume that it is based on this that Tern has re-valued its own holding of prefs upwards from £50,000 to £78,857.

So here is what I don’t understand: if we apply that issue price of $0.929281 to Tern’s holding of 95,716 preferred shares we get a figure of $88,947. If that is valued at £78,857 it implies a £/$ conversion rate of $1.128 to the £.

According to ADVFN £1 was worth $1.473 at the end of 2015. That would value Tern’s holding in Seal (using the last share issue figures, as per Tern’s FY15 accounts) at £60,384 - £18,473 less than Tern has valued it in its FY15 accounts. It might imply that Tern has overstated the value of its holding by some 30%.

So have I got something wrong? Perhaps Seal has issued more stock before the end of 2015 at a higher price and hasn’t yet filed the return for it (despite the deadline being a month after issue). This is quite possible – after all the Annual Returns for 2014 and 2015 were filed late, and its accounts for calendar 2014 (due by the end of Sept 2015) were also filed late – they did not receive audit sign-off until 21 Dec 2015 and were finally released by Companies House on 5 Jan 2016.

I’m sure there will be a perfectly reasonable explanation for this, as Tern’s accounts were themselves audited by the fine firm of Jeffreys Henry LLP.

So perhaps I just don’t understand the valuation, just as I don’t understand the accounting of Flexiant and the old adage of not investing in things you don’t understand should apply. 

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