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By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 9 January 2018
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 (TERN) has announced that it has drawn the second tranche of its death spiral loan early. The first tranche saw Tern’s stock marched down from over 5p to as low as just 1.75p. The starting point for tranche two is just under 3p and the shares have already notched up a low of 2.125p, although they have recovered to 2.5p as I write.
When this package was first announced, on 30th November we were told:
The CULNs will be issued in principal amounts of £25,000 and aggregated into four tranches (the "Tranches"), with the first £550,000 (before expenses) , committed. The remaining three tranches will be made in equal amounts every 60 calendar days, unless requested earlier or later by Tern, and approved by the issuer of the CULNs
Here we are, not sixty, but just forty days later and tranche two has already been drawn. That doesn’t speak well for Tern’s financial controls, does it?
Given the way that the stock was completely trashed by tranche one, I still reckon we will see the 1p mark taken out before the death spiral has played out. Meanwhile, with Tern’s market capitalisation falling on each conversion (and it is now just £4 million) and £1.65 million of loans still to be converted, the only way is down.
The funder, who is not the shareholder’s friend (it's not part of the business model) can convert at the lowest closing bid price of the previous three days ahead of the conversion notice being served. So the more the shares can be trashed over the coming three days, the more money the funder will make. There was no commitment not to go short of Tern’s stock, so Mr D Spiral can just forward sell as hard as he can to drop the shares and then convert. It is a one-way bet for him.
The bulletin boards are once again full of ramptastic nonsense, with predictions of £1 a share. With a death spiral in place you have no idea how low the shares will go as the funder chucks out as many shares as it can to get its cash. So you have no idea how many shares will have to be issued and no matter how bullish about Tern’s principle investment Device Authority you are, you can’t derive a target price for Tern until the death spiral has finished.
Tern remains a slam-dunk sell, its main business remains not in the high-tech world of the IoT (Internet of Things), but in the world of confetti production.
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