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Tern – forget the portfolio update, it’s a death spiral, stupid

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 30 November 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.

AIM-listed Tern plc (TERN) has issued a portfolio update RNS this morning, but that is not the story. It waxes lyrical about how well Device Authority is doing – but what about the $10m fundraising? Step forward the Statement Re Issue of Convertible Unsecured Loan Notes and Loan To Device Authority for that is where the real beef is. It’s not pretty.

First up, here we have Tern resorting to a death spiral to raise enough money to keep its own lights on, and maintaining its current position in its portfolio companies. On the face of what we are told this morning, as death spirals go it looks less bad than some of late. Conversion to Tern stock is either at 125% of yesterday’s close (that won’t happen) or the lowest closing bid price from the three days ahead of conversion.

So there is no discount on conversion – but we are not told what expenses are being charged. Are the loans being issued at a discount to par? Dunno. What fees have been charged? Dunno.

As much discussed by Tom Winnifrith (eg HERE) the point is death spirals always (or almost always) pull the shares downwards - and they are already off by some 24% today. It won’t stop there - there’s plenty more to come.

But worse still is the tacit admission this morning that the fundraising for Device Authority appears to have drawn little support. Having announced the fundraising at 75c per shares, implying a pre-money valuation of some $36 million, today we learn that Tern has spent just $150,751 on providing convertible loans to Device Authority, convertible at just 47c (if DA fails to get a funding round away for $2.5 million before 31 March 2018) or at a 20% discount to that funding round if it is completed before 31 March 2018.

I said ages ago that the DA funding round looked incongruous when compared to Tern’s share price, and that investors would be better just to buy Tern stock. I guess, with Tern’s shares down at just 3.875p that case is all the stronger. I simply cannot see DA raising any cash at all at 75c as advertised. Stranger things have happened, of course, but I don’t see it happening.

DA is being funded with $0.5 million of convertible loans from its shareholders (including Tern). That looks like cash to keep the lights on, and in Tern’s case it is being funded from a death spiral.

I said at the start of this month that I thought Tern was heading for the perfect storm (see HERE). Now, having announced a fundraise for DA which should have seen $2 million flow into Tern, Tern is having to pony up to fund DA. At the time the shares had slumped to  4.375p. Now they are 3.875p and encircled by a death spiral.

My view: keep selling.

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