By Nigel Somerville, the Deputy Sheriff of AIM | Friday 24 February 2017
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.
Tom Winnifrith has already driven a coach and horses through the deal announced on Wednesday whereby an obscure US-based outfit has apparently agreed to throw $2 million (and up to a further $4 million) into AIM-listed Servision (SEV) at a massive premium to the share price previous to the announcement. But a no-one-is-watching o’clock RNS last night leaves me wondering whether the whole thing is so appallingly dressed up as to render the original RNS a gross misrepresentation of the truth.
The deal, with Cascade SVP, LLC, involves Cascade apparently subscribing for two batches of about 7 million shares at about 11.4p per share. This apparently brings in $2 million for Servision.
In addition, Cascade has an option to bung a further (up to) $4 million under an option arrangement in two equal tranches at 10.2p and 9.3p per share.
That, against a closing share price of just 2.75p the night before this deal was announced. We have already asked questions about whether there are a few fees involved but which have not been disclosed. Maybe, maybe not.
But the whole thing looks to be so off the too-good-to-be-true scale that one has to wonder whether the whole thing is just a huge spoof.
Are we really to believe that little old Servision has just managed to get a fundraising away at something like 414% of its previously prevailing share price? A company which had been surviving on emergency loans? Really?
The RNS of Wednesday went on to describe the two batches of c. 7 million shares at 11.4p a pop as the “Subscription Shares”. But two details buried in that RNS stated:
A condition of the Subscription is that if the Company's shares are not listed on either the Main Market of the London Stock Exchange or on Nasdaq, or if the Company has not been sold for a price higher than the Issue Price, before 21 February 2019, then any new capital raised by the Company thereafter must first be used to buy back the Subscription Shares, together with any new ordinary shares issued pursuant to the Options, that are still held by Cascade at the same price(s) as they were issued.
Right, so assuming Servision gets nowhere near a Main Market listing on the LSE or a Nasdaq listing, and that it hasn’t been taken over for more than “the issue price” (defined as being approximately 11.4p) in two years’ time then the company has to buy back all the shares issued to Cascade at the price paid by Cascade out of any new funds being raised.
That’s not a very permanent subscription, is it? That sounds more like a loan to me.
But what if the company can’t get the cash to repay? Ah, all is well because….
In event that the Company defaults on the terms of the Subscription…..Gidon Tahan, Chairman and CEO of SerVision, is providing a personal guarantee to Cascade to cover the issue of the Subscription Shares.
I would have thought anyone reading that would conclude that this means that Mr Tahan has agreed to buy the shares back from Cascade if the company cannot (or will not). That’s very generous of Mr Tahan, and an incredible sign of confidence. Yup, truly incredible.
All of the above suggests the most extraordinary confidence in the company’s prospects: Cascade is paying a massive premium and Mr Tahan is putting his own cash up as a guarantee. Really?
So what about that personal guarantee….to cover the issue of the Subscription Shares?
Last night, with an RNS released after-hours at no-one-is-watching o’clock (4.56pm) it looks to me as though that guarantee was indeed not credible. In that RNS we learn of:
A personal guarantee by Gidon Tahan for which security over 9,857,881 Ordinary Shares has been granted to Cascade SVP, LLC should the Company default on the terms of a subscription with Cascade SVP, LLC
So is the extent of Mr Tahan’s personal guarantee that he has (so far) granted security over c. 10 million of his own shares in the company to Cascade? That sounds to me more like a pledge of shares by him.
Is that the same sort of pledge we were told of in relation to the AIM-listed companies whose top brass we exposed as having, in fact, SOLD their shares to Equities First Holdings LLC whilst retaining a right to repurchase them (provided there hadn’t been a default in the meantime), and which EFH was meanwhile free to dump on the market as soon as it pleased?
I wonder: has Mr Tahan retained title over these shares? Can Mr Tahan definitely vote these shares throughout the period during which security over them is granted to Cascade? Or have they simply been handed over, with the possibility of that number of shares being returned at some point in the future?
Is the truth of the matter that Cascade can simply (and could already have done so) sell all these shares apparently put up as security by Mr Tahan?
If I were Cascade, I would be loath to be ponying up all that cash as such a massive premium to market as an investment into a company which some might consider to be cash-strapped and possibly with questions over its accounting policies being posed by the FRC.
On the other hand, if I could get the company’s head honcho to hand over about 10 million shares to me which I could sell at, say, around 5.5p on the day the “subscription” deal is announced (netting me something heading for $700,000) then that first $1 million “subscription” looks a bit better. Gosh, that rally which was sparked by the subscription RNS was a stroke of luck.
It looks even more attractive if I can simply dump the first line of c. 7 million shares at something around 5p (netting me perhaps another $440,000). Let’s see: $1 million out; $1.14 million in. Now that makes sense.
I might even lob in a few fees on top, just because I can.
Of course, there is a further tranche of $1 million of funding to find. But maybe there are more “security” shares to be put up.
Now let’s look at what happens next. Either:
1) The company starts to generate pots of cash and the share price rockets. Whether or not the company gets a full listing or gets on to Nasdaq is irrelevant to me (but a nice bogus bull point for the BBMs) since I don’t have to return the subscription shares at all. But I do have to hand back the “security” shares, so my options to pick up more stock at 10.2p and 9.3p act as a useful insurance policy. Indeed I’d take up all the option shares I can so that I can dump the rest of them and rack up more profits. Everyone is happy.
2) If, on the other hand, the shares collapse then I call in my right to get that full refund on my over-priced subscription shares. The company can’t pay so I enforce my rights over the “security” shares. Since I’ve already sold them everyone just walks away. I’ve made my bunce right at the beginning of all this so I’m alright Jack. Meanwhile Mr Tahan has lost his shares – but since they are worthless he’s not bothered.
Now obviously the BBMs will be salivating at the prospects offered by scenario 1. Pots of cash being generated, the head honcho providing a personal guarantee against his company defaulting on the refund clause which shows just how confident he is, a Nasdaq listing – what’s not to like? The problem is that it now looks as though the guarantee is not going to cost him anything if it all goes wrong. It’s not much of a sacrifice, is it?
Naturally there is no possibility that scenario 2 will come to pass as Servision is not a worthless POS that tells lies in its accounts and which has just kicked the insolvency can down the road for a couple of years.
We were told on Wednesday that:
Gidon Tahan, Chairman and CEO of SerVision, commented, "This investment is a very positive endorsement for the Company and its future potential….
and just to keep the BBMs salivating:
Craig Flashner, a Director of Cascade, said, "We are very pleased to be investing in SerVision….
So we can all look forward to a TR-1 from Cascade which shows that it has not dumped the 7 million subscription shares heading its way (over 5% of the company’s to-be-enlarged capital). Indeed, with such a strong endorsement of the company and its future potential, I’m sure that Servision will want to disclose the full terms of its deal with Cascade, and confirm that Cascade will neither dump the shares or palm them off in any other way.
And I am sure that the company will also be delighted to clarify the full terms of Mr Tahan’s personal guarantee to show that it is not just a case of Cascade dumping his stock for him.
Surely it could not be that this whole episode is just one massive spoof under which the company has managed to get a placing away which has been subsidised by the sale of the CEO’s shares? Surely?
Perhaps Nomad Allenby would like to clarify…..we wouldn’t want the market to be given the wrong impression, now, would we?
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