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Tern – basis of valuation of investment in Device Authority Limited

By Tom Winnifrith | Tuesday 11 October 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.

We have challenged Tern (TERN) repeatedly on the basis of its valuations of its investments previously. Well now we have accounts out for its major investment, Device Authority.

On 21 April 2016, Tern announced the acquisition by its investee company Cryptosoft Limited of Device Authority Inc. In that announcement, Tern stated that it valued its holding at “acquisition £6.1 million (31 Dec 2015 £961,439) prior to new investment” Device Authority Limited (as Cryptosoft Limited has now been renamed) has now filed its accounts for the period ended 31 December 2015 and we can now get some detail of the net assets supporting its valuation. The company relied on the small company’s exemption and there was no profit and loss account so we can’t see what, if any, revenue was generated.

The balance sheet showed net cumulative retained losses of£1.1 million for the period leaving the company with a deficit on shareholders’ funds of £0.8 million. Cash was only £4,902 and net current liabilities were £182,192. Cryptosoft was clearly reliant on cash injections from Tern and the announcement of 21 April 2016 stated that the valuation of £6.1 million on acquisition reflected the conversion of £670,000 of debt owed by Cryptosoft to Term into equity.

The Tern plc announcement of 21 April 2016 also included some information from the management accounts of Device Authority Inc. for the 12 months ended 31 December 2015 which stated that it had revenue of $254,000 on which it had generated a loss of $1.5 million. At 31 December 2015 it had total assets of $189,000 and a short term loan of $1.2 million which was to be converted into equity shortly after completion of deal, so total assets of $1,389,000 or circa £950,000.

Based on new money invested both Cryptosoft Limited and Device Authority Inc. were valued at £6.1 million which together with £1 million of new cash from Tern and $0.5 million from Alsop Louie Partners (“ALP”) to fund “business development” resulted in valuation of £13.6 million. Tern’s ownership was stated as being 52.4% or approximately £7.1 million.

So as with so many small AIM technology stocks, there are little net assets, ongoing losses and cash burn but the jam tomorrow is already baked into the valuation because this is about the internet of things.

All hail the IoT, with the IoT "it will be different this time." Yadda, yadda, yadda.

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