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Tern - The credibility of its investment valuation process in the spotlight

By Tom Winnifrith | Tuesday 13 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 (TERN) is very excited about Device Authority which it values at £7,144,288 which represents over 98% of the net assets of the company. So Tern’s credibility when valuing investments is important. So let’s have a look at its historic track record.

In its accounts for the year ended 31 December 2015 approved on 26 January 2016, Tern listed its four investments at a total value of £810,350 comprising:

Cryptosoft Limited (now Device Authority) £342,026
Flexiant Corporation Limited £269,270
Push Technology Limited £120,197
Seal Software Group Limited £78,857
Flexiant Corporation Limited

We have already commented previously on Tern’s investment in Flexiant and why we thought the valuation was optimistic. Flexiant was recorded at a valuation of £269,270 against original cost of £134,635 but was written off in interim accounts for the six months ended 30 June 2016 following Flexiant being placed into administration.

Push Technology Limited

In the six months ended 30 June 2016, Tern announced that it had written down its investment in Push Technology but did not specify the quantum of the write down.

So was Tern being optimistic when it continued to record its investment in Push at cost of £120,197 at 31 December 2015. It appears so because the Push accounts for the year ended 31 December 2014 signed on 29 October 2015 included an emphasis of matter paragraph in the auditor’s opinion. That is to say that, ceteris paribus, the bean counters reckon it could well be a zero

Seal Software Group Limited

Tern recorded its investment at £78,857 being an increase over cost of £50,000 based on the price on shares issued in the most recent fund raise. How has the company actually performed based on its last filed set of financial statements?

The accounts for the year ended 31 December 2014 showed a loss for 2014 of $7,283,464 on turnover of $4,602,539 and cumulative retained losses of $17,044,215 funded by issue of share capital leaving net assets of $166,702 for the company. The Directors report indicated that the accounts were prepared on the going concern basis because of the successful raising of $8,660,812 subsequent to the year end and an additional $7,500,000 to be received by 7 July 2016. Tern was silent on the progress of its investment in Seal Software Group for the six months ended 30 June 2016 but unless it participated in the subsequent capital raising its stake may have been diluted.

So of the three other investments, one has been fully written off, one has been written down and the last is carried at uplifted value over cost notwithstanding huge losses funded by issues of new share capital.

A final thought investing in startup technology businesses is risky which is why most investors adopt a portfolio approach. Are Tern investors really comfortable with effectively backing a single investment especially given its historic track record?

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