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By Nigel Somerville, the Deputy Sheriff of AIM | Wednesday 29 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.
So after all the questions, AIM-listed Servision (SEV) has provided answers. The AIM Rule 26 pages have been updated (after a year, vs 6-months under AIM rules), the personal guarantee of head honcho Gidon Tahan to white knight investors Cascade has been clarified and yesterday lunchtime we even had a TR-1 showing that Cascade was indeed holding the shares issued to it at over 400% of the previously prevailing share price ahead of the announcement of the funding package. But I still think the whole deal is a massive spoof and here is why.
Firstly, just think about it: a company surviving on emergency loans comes along and asks you to invest, and you say “no problem, we’ll pile in at four times your current shares price – no matter that you are surviving on emergency loans and have had a few questions asked in the past about revenue recognition”.
Alternatively, you are an investor a see a company suffering a bit of a cash crisis and offer it bail-out finance….at four times the current share price.
It surely reads as being too good to be true.
Now the original RNS announcing this package had all sorts of caveats – the biggest Red Flag being that there were circumstances under which Cascade can simply ask for its money back. So if Servision is not listed on Nasdaq or the Main Market of the LSE by 21 February 2019, and hasn’t been taken over for a higher price than the massive premium price paid by Cascade by then, then Cascade can ask for its money back out of any new capital raised thereafter by the company.
We were also originally told that Servision’s visionary boss, Gidon Tahan, had provided a personal guarantee to Cascade to cover the issue of subscription shares, with the RNS stating that this would be “In event that the Company defaults on the terms of the subscription”. That left a lot of wriggle room – did that encompass the buy-back condition, for example? Had it involved Mr Tahan simply handing his shares over to Cascade until such time as all the conditions had been met (ie repayment terms either met or avoided?) Being a raving cynic, it would be apparent to me that if Servision couldn’t buy back the shares then it would be probable that Mr Tahan’s shares were worthless anyway, but some saw this as a great commitment.
But no: it was later clarified that this was simply giving Cascade a call over Mr Tahan’s shares in the event that Servision failed to deliver subscription stock. So Mr Tahan will be off the hook when tranche 2 takes place, and he continues to own and hold all his stock.
Thanks for the clarification, fellas.
Oh, and thanks for updating the AIM Rule 26 web pages which were supposed to have been updated half a year ago, under AIM rules.
And thanks for getting that TR-1 out. Anyone would think that some combination of Servision, its Nomad (Allenby) or simply the oxymorons at AIM Regulation read my last piece on Servision!
But let’s just take a look at that TR-1: Cascade acquired 7,107,850 shares in the company on 7 March 2017 and informed the company on 27 March. 20 days later - so much for investor protections under DTR regulations, then!
But hang on a moment: Servision announced the allotment of not 7,107,850 shares (the number offered in yesterday’s TR-1) to Cascade but of 7,044,542 shares – not on 7 March (as per yesterday’s TR-1) but on 1 March 2017. The shares were expected to be admitted to trading on 7 March so perhaps that explains the confusion over the dates. But the number of shares isn’t right either.
Then, on 9 March 2017 Servision announced a few extra shares had been issued to Cascade under previously undisclosed terms attached to the funding deal, that Cascade gets more shares if there is a “dilutive event”. So either Servision was very tardy in announcing the additional shares (triggered by a warrant exercise disclosed in the same RNS) or Cascade got two tranches of shares, making yesterday’s TR-1 RNS seem erroneous as to the finer detail.
Well, whatever. I fancy nothing more than a slip-up, but it hardly reads like the product of a well-oiled machine.
No, the big Red Flag in all of this is the potential for Cascade to demand a refund.
I just keep coming back to the idea of Cascade bailing out a cash-strapped cash-burning company at four times the prevailing share price. It is fantastical.
Obviously, if Servision’s share price roofs it over the next couple of years then Cascade is quids in – and will no doubt be keen to exercise its options to get a stack more shares (a bit cheaper) so as to maximise its gains.
But if Servision fails to bring home the bacon and hasn’t been taken over at a higher price than Cascade pays and hasn’t got onto Nasdaq or the LSE main market by 21 February 2019 – less than two years away – then any further funds raised by Servision after that can be demanded as a refund by Cascade.
So heads Cascade wins, tails and it all morphs into a loan.
One could be uber-cynical and compare the package to a loan which matures in February 2019 but which is convertible upon a take-over at a premium to the conversion price, or the listing of the shares on the main market of the LSE or Nasdaq. But the conversion price is still four times the share price prevailing ahead of the announcement of the deal.
That reads rather differently: who would convert unless the shares had gone up sharply? Instead, why not just get the loan repaid if the gamble doesn’t come off (and hope that the company can pony up)?
It all has a similar smell to Monday’s loan deal announced by Advanced Oncotherapy (AVO) which involves an optional (to the lender) conversion at more than three times the current shares price. Oh, and options to pile in more cash at five times the current share price.
Hey, Servision, you missed a trick! Where are the options for Cascade exercisable at, say 20p? Or £20? Or, indeed, why not £2m a share – since it makes no odds: they won’t be exercised (not unless someone like Slater & Gordon comes along with a massively over-priced offer, at any rate).
Nope, I still think it is all a big spoof, a loan dressed up as an investment.
Servision published its FY15 accounts (via RNS, at any rate) on deadline-day of 30 June 2016. If the company follows this same timetable next year, there is a bit of a potential liability which could fall due less than 12 months from audit sign-off. In other words, the Cascade loan(s) – oops, I mean subscriptions with conditional refundability – surely a current liability on the Servision balance sheet at that time. Hardly an enticing prospect for any new investor.
But if Servision is out of cash at the end of February 2019 it will need to do a fundraising and it will have to hand over enough loot to pay off Cascade before having a penny to spend on paying its own bills, let alone cobble together enough cash to get a going concern sign-off at audit. Who would provide funds under that circumstance?
Meanwhile, the Cascade funding package allows Servision to draw up to $2 million at silly inflated prices. In FY15 the company burned through $162,000 of cash despite raising $2.6 million of cash from placings even after loan repayments. That $2 million from Cascade doesn’t look like it will go very far.
In the short-term, Servision has a bit of cash to play with – although I fancy not that much after settling short term bail-out loans and whatever payables it can’t stave off any longer. Even at June 2016 the company had net current assets of MINUS $0.9 million.
Now it could be that Servision lands itself the contract of all contracts and its finances pick up very well as a result.
Or it could be that it is not different this time, and Servision simply runs out of other people’s money in less than two years and can’t raise new cash sufficient to keep the business going after paying off Cascade ($2 million) and any outstanding bills.
With a market capitalisation currently of (according to ADVFN) just £5.7 million, raising in excess of $2 million just to keep Cascade at bay – let alone fund any ongoing losses – might be a bit of a big ask.
The clarifications and regulatory compliance work is good to see, but the Cascade package makes no sense to me from the perspective of Cascade or of Servision’s shareholders.
Not one for me, then.
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