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Tern – a reader looks under the bonnet re Flexiant

By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 10 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.


Following on from kicking the tyres at AIM-listed investment vehicle Tern plc (TERN) which took a quizzical look at the accounts of Flexiant Corporation (and its subsidiary), we have had a note through from a reader. I wondered what a consolidated balance sheet might look like for a company which has about £12 million of current assets in the form of a loan to its subsidiary – but which the subsidiary reports as a non-current liability (for the same accounting period). Over to our reader…

I thought you might like to see what the Flexiant Group balance sheet might look like performing a very simple consolidation (the intercompany balance is as you noted GBP1 wrong.) (See below).

Overall it is a picture of a group that has retained losses of £12.1 m funded by new share injections from the parent.

The subsidiary consumed over £1 million of cash in 2014 of which was £575,572 was spent on intangibles in the year which later on the directors decided couldn't be supported by reference to future cash flows (see below) 

You might argue that it has built up some very valuable intangible assets but as note 2 to the Flexiant accounts show net intangibles are a puny £5,234 after routine amortisation and an impairment in the period of £497,628.

Then I realized why I must be wrong about Flexiant's value because is it leading provider of cloud orchestration software for on-demand, fully automated provisioning of cloud services to which normal valuation criteria don't apply so it could clearly be worth a huge amount!

DS note – ah yes, that’s where I’m going wrong with all this. Because Flexiant does “cloud” stuff it is different this time. Normal metrics don’t apply and I’m just a miserable old git for not seeing that all along.

Although if the technology is so good why can't the company support its intangible assets by reference to future cash flows and why does it always consume cash ...

DS note – the simple consolidation follows, but first let us bear in mind Tern’s valuation method (as per its FY15 accounts) - Valuation, which includes convertible loan stock, is based on the price of shares in the most recent fund raise, which is taken as fair value – and apply it across all of the various classes Flexiant Corporation shares (number of shares taken from a filing for the share allotment dated 17 Mar 2015, the last filed statement of capital):

Class       price                number               value

A Ord          £4               5,466,310       £21,865,240.00

B Ord          £1                   872,000             £872,000.00

C Ord          £1.40                  3,878                 £5,429.20

D Ord           1p                  545,000                 £5,450.00

                                         Total                £22,748,119.20   

And so, as I understand it, Tern’s FY15 accounts imply a valuation for Flexiant Corporation of £22,748,119. And now for our reader’s simple consolidated group balance sheet for Flexiant, for FY14 (the last available numbers):

 Consolidation (£)

                                        Flexiant            Flexiant          Eliminations            Flexiant

                                  Corporation           Limited                                              Group

                                          Limited

Intangibles                                                5,234                                                     5,234

Investment                             1                                                        (1)                      -

Tangible assets                                       42,715                                                   42,715

Cash                                                        345,642                                                 345,642

Inter co debtors         12,573,669                                 (12,573,669)                 -

Other debtors                                       478,345                             (1)               478,344

Creditors                         (156,418)    (400,521)                                               (556,939)

Inter co creditors                              (12,573,670)        12,573,670

Net assets                    12,417,252  (12,102,255)                        (1)                 314,996

Share Capital                      68,614                      1                          (1)                   68,614

Share Premium           12,348,638                                                                  12,348,638

Profit and loss                                   (12,102,256)                                        (12,102,256)

Equity                            12,417,252 (12,102,255)                         (1)                  314,996

 

DS note: so net assets are £314,996 for a loss-making enterprise which is valued at heading for £23 million? Surely I’m missing something here? Ah yes, slap on wrists, it is different this time because it is “cloud” stuff. 

Meanwhile Tern carried its investment into Flexiant on its balance sheet as being £200,000 (£4 per A Ordinary Share) as at FY14, with a cost of £100,000 (£2 per A Ordinary Share) on the basis that Valuation is based on the price of shares in the most recent fund raise, which is taken as Fair Value. As at FY15 its investment is valued at £269,270 with a cost of £134,635 on the basis that Valuation, which includes convertible loan stock, is based on the price of shares in the most recent fund raise, which is taken as fair value. Given that the only share allotment filing at Companies House for Flexiant Corp during 2015 was for A Ordinary Shares at £4 each (in March), does that suggest that Tern’s valuation includes debt convertible at £2 but which has not yet been converted (and thus the £4 valuation per A Ord still stands) but conversion has been assumed in the valuation and hence £4 a share is applied? 

I’m glad I’m not an accountant, bearing in mind that I don’t understand the valuation of Seal Software in Tern’s FY15 numbers (to the tune of £18,473) and now I don’t understand the valuation of Flexiant to the tune of (at least) £134,635. That is quite a lot not to understand out of a balance sheet showing net assets of £1.69 million – around 9%. And that is only half of the investment portfolio, yet Tern closed yesterday at 15.25p (mid) giving it a market capitalisation of £9.6 million (source: ADVFN). 

Meanwhile, our reader has found some very useful information on Flexiant which should explain why it is worth heading for £23 million despite the simple consolidated balance sheet (for FY14) showing net assets of just £314,996…. 

About Flexiant

Flexiant is a leading provider of cloud orchestration software for on-demand, fully automated provisioning of cloud services

Flexiant offers our customers the most advanced cloud orchestration software in the market. We have some of the best technical experts and industry thought leaders working at Flexiant, but our focus is not on technology (even though we create industry leading software). Our focus and vision is on understanding the cloud services market and how service providers and telecom

operators must innovate and differentiate to deliver cloud services that organizations love. We arm our customers with a platform that helps turn innovative ideas into revenue generating services quickly and easily.

With Flexiant, you’ll be in a position to win the war on the cloud battlefield.
Flexiant’s cloud orchestration software gives cloud service providers business agility as well as the freedom and flexibility to scale, deploy and configure servers, simply and cost-effectively.
We have created and will continue to create, the best cloud orchestration software available in the market. Our clients will be among the first to seize the opportunities of cloud computing as the industry evolves.

DS note: this cloud stuff sure is clever - really, it is different this time, innit.


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