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By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 1 March 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.
There was no great surprise from AIM-listed Servision (SEV) in relation to the arrival of the first lump of cash from (nothing to do with Bill Gates) Cascade as announced this morning. But there were a few interesting clarifications in relation to the personal guarantee of Servision head honcho Mr Gidon Tahan which are worthy of comment. As for the subscription at a (still) incredible premium, it still all looks too good to be true.
To the clarifications first. Last Wednesday we were told that:
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. Such a buy back would require the Company to have sufficient distributable reserves, which may involve a capital reduction, and would also require shareholder approval.
In event that the Company defaults on the terms of the Subscription, albeit that the board of SerVision believe that such an event is extremely unlikely to occur, Gidon Tahan, Chairman and CEO of SerVision, is providing a personal guarantee to Cascade to cover the issue of the Subscription Shares. Mr Tahan is receiving no payment, nor any other benefit, for providing this guarantee.
That sounded as though Mr Tahan was offering a personal guarantee to cover the potential that Servision failed to be in a position to buy back the subscription shares if/when this was demanded by Cascade. The subsequent RNS announcing that security over Mr Tahan’s shares had been granted to Cascade looked horribly to leave open the possibility that he had simply handed his equity over for Cascade to sell.
We asked questions about this last Friday, and finally, today, we are now told that Mr Tahan continues to retain full ownership and voting rights in relation to the shares put up as security, and that an obligation to transfer the stock to Cascade will only occur if Servision fails to deliver the second tranche of equity under the subscription agreement. In simple terms, it looks to be there to cover the unlikely eventuality that Servision shareholders reject resolutions to be put to them allowing the company to issue more shares.
That is very good news, and removes suspicion of an underhand subsidy buried in the detail of the transaction. Why was that not made clear in the first place?
And so we now have a situation where Cascade has indeed agreed to pony up at more than 400% of the previously prevailing share price (before the deal was announced). It still looks too good to be true.
Will Cascade hold on to the shares, or just sell into the rather stronger share price (indeed, has it already forward-sold?) since the deal emerged?
And if Servision – with quite a long record of burning cash - does not get on the main market or Nasdaq in the next couple of years, and the shares remain below the 11.4p just paid by Cascade, will Servision have the cash available to make good its obligation to buy the shares back at the issue price?
It all still looks like a loan to me.
I can see the phone ringing in, say, 20 months’ time.
“Hi, it’s Cascade here: you need to buy those shares back at 11.4p. Have you got the bunce? If not, we’re here to help……why not do a placing with us? What shall we set the discount at?”
Of course, Servision will release a TR-1 from Cascade in a few days’ time showing that Cascade is holding on to all of its stock and there will be no sale by Cascade going forward, so that’s all fine. It all makes perfect sense to pay 400% of the prevailing share price for stock in a company surviving on bail-out loans.
And the options to buy more are not there as a get-out-of-jail in the unlikely event that Cascade dumps its holding and Servision shares roof it before the deal comes to an end.
Meanwhile, if I were running Servision I’d be on the blower to get a placing away. $2 million may sound like a great deal of cash coming in, but the record of cash-burn suggests that the going concern statement in forthcoming FY16 accounts may have been the principle concern.
Now, with no personal cash guarantee by Mr Tahan confirmed, this time next year there is every possibility that Servision will have a potential current liability on its balance sheet.
I fancy that the solvency can has merely been kicked down the road.
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