By Nigel Somerville, the Deputy Sheriff of AIM | Sunday 11 September 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.
Tern plc (TERN) investee company Cryptosoft Ltd as was (now Device Authority Ltd) has filed its accounts for the fifteen-and-a-bit months to Dec 2015 and the picture painted is not pretty. Nor is the cross-match (or lack of it) to the accounts of (then) majority owner Tern plc. Call me a pedant, but surely the investment by Tern into the share capital of Cryptosoft at period end should not exceed the total of share capital and share premium, should it? Oh, and then there were a few balance sheet issues.
We are helpfully given comparatives as at 11 Sept 2014 which means that the profit and loss account of MINUS £1,112,643 was all racked up in the period of 12 Sept 2014 to 31 Dec 2015. That’s quite an attrition rate, although bulls will point to the cost of development work. No doubt this will all be fine in the fullness of time if those pesky revenue-generating contracts start to flow.
But then there is the matter of negative net current assets, to the tune of £208,465. Lob in non-current creditors (loans from Tern plc) of £801,605 and hey presto we had net assets of MINUS £801,605. Ouch. But again, the bulls will argue that those revenue-generating contracts which are going to come from the pipeline of new business will make it all fine. When they come.
So it does rather appear that Cryptosoft was living a tad beyond its (Tern plc funded) means as at FY15, although with funding available from Tern plc (and provided, going forward) it doesn’t look to be a case of trading whilst insolvent. It just doesn’t look all that great to have negative working capital, negative net assets and a stonking great loss.
So far, so good. Well, it will be good if these long-promised deals ever bring home the bacon – although the timescale to the receipt of all that Hartley’s seems to slip ever further out.
But, of course, this is all rather yester-year since Cryptosoft and US Device Authority underwent a spot of M&A earlier this year. We don’t have much to go on in terms of what the newly merged entity looks like, although Cynical Bear had an interesting take on the implied valuation (see HERE). I guess that the next set of accounts (perhaps a year from now) will put some flesh on the bones.
Bulls might also want to note the RNS last week announcing the strategic partnership between Device Authority (formerly Cryptosoft) and DigiCert. I may be a technology Neanderthal, but even I’ve heard of DigiCert. How very exciting – except the RNS contained no numbers at all. One would imagine if there were contracted and significant numbers involved - ie revenue, cash generation and such like – they would have been included. But they weren’t, so just more opportunities added to the pipeline, then.
Back to those accounts, and more to the point, the anomalies in those FY15 accounts. My problem with accounting anomalies – and less than fastidious Companies House filings – is that I have not yet seen an example of a company delivering shareholder value which can’t get its accounts and filings right. Perhaps I am just unlucky. Or perhaps it is a sign of a badly run company.
My difficulty is this: Tern plc filed its accounts for FY (and calendar) 2015 which stated that it valued its investment in to (then) Cryptosoft at cost: Equity ownership £342,026 and loans of £619,413 making for a total of £961,439.
We might pause for a moment and consider that valuation in the context of the £1.1 million loss for the period, the negative net current assets and the negative net assets. But not to worry, this is jeux sans revenue high-tech at its best, so we shouldn’t bother our little heads about that.
But Tern told us it had ponied up a total of £342,026 for its equity stake in Cryptosoft as at calendar FY 2015, right?
So how come Cryptosoft now reports called-up share capital of £11,041 and share premium of £299,997 – a total of just £311,038 - on exactly the same accounting date? That is already a difference of some £30,988, but it goes a little higher.
We also see from the Cryptosoft accounts that a sum of £1038, due in respect of unpaid but called up, share capital is noted in the balance sheet (up from £1000 the previous period). Note 4 to the accounts tells us that this was cash due from the Directors of the company (as was £1000 in the previous period) for shares allotted to them.
So to my simple mind that means that of the share capital and share premium (ie the total amount raised by Cryptosoft from share issuance), a maximum of £310,000 came from Tern plc. Yet Tern tells us in its accounts as at the same accounting date that it had paid £342,026 - £32,026 more than appears feasible. Where did that go, for it seems that it was not to Cryptosoft?
I am further confused by the share allotment filings by Cryptosoft (as it was then known), the last of which (during the accounting period ending 31 Dec 2015) shows share capital of £11,041 (as per its FY15 numbers) as at 22 July 2015. None of it is marked as being unpaid capital. Surely something is wrong with this filing (dated 28 October 2015, itself the third attempt at reporting the numbers to Companies House) or with the numbers presented in the FY15 accounts.
Was that £1038 of share capital paid or unpaid? According to company filings, there was £1000 of unpaid capital as at 11 Sept 2014, it was all fully paid as at 22 July 2015, and £1038 was unpaid as at FY15.
How can Tern plc have paid £342,026 for shares which cannot have been issued for more than £310,000, as indicated in the FY15 accounts of Tern plc and Cryptosoft Ltd (now Device Authority Ltd)?
Given the mis-match in those two sets of FY15 numbers, it seems a little surprising to find that both were audited by the same firm, and signed off by the same auditor.
I’m sure there will be a perfectly rational explanation for all this, but perhaps I might be forgiven for sensing that something just isn’t quite right.
And if that’s not right, one wonders what else might be not quite right either.
Never miss a story.
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