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By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 15 May 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.
I said the other day that following the £1.75 million placing at 18.5p (a 30% discount) last week it looked as though Tern plc (TERN) had enough cash to see it through for the time being. But I’ve been looking through the FY17 Annual Report and now I’m not so sure. In fact I am sure it does not have enough cash. Its portfolio of investee companies looks a shambles and it seems that Tern has been paying some of its investees’ bills. Quite how auditor Grant Thornton thought the company fit to pass as a Going Concern is a mystery to me.
Let us start with Companies House, where I tried to download the Annual Report, only to find that the filed document there shows just eight pages. It includes none of the vital notes to the accounts! On Tern’s website the document is 52 pages. One wonders why such an abridged version has been filed at Companies House.
In the full document, we might look carefully at Note 20 – the Related Party Transactions. Firstly we see that:
Device Authority Limited, a company in which Tern has a controlling shareholding, is also considered a related party. During the year Tern invoiced Device Authority Limited £20,000 (2016: £39,715) in respect of management services. At the year-end Tern was owed £12,000 in trade receivables by Device Authority Limited (2016: nil). Tern has also provided a convertible loan note to Device Authority Limited. As at 31 December 2017, £382,436 was outstanding (2016: nil).
Well hang on a minute: why has Device Authority not paid its management services fees to Tern? Are we really saying here that Device Authority couldn’t find £12,000 out of £20,000 (more than six months worth!) despite being funded by Tern to the tune of £382,436 in the form of a loan note? Does that not suggest a real cash crisis at DA? Does it also suggest a cash crisis at Tern, which surely would have lent out more just to have its own bills paid, and avoid the tacit admission that DA’s coffers were bare?
And hang on another minute: we see that Tern paid out £382,436 to DA in the form of a loan note. This was, in part, announced by RNS on 28 December 2017 when we were told that:
Tern has committed to contributing up to $721,162 to the DA Loan, which will be provided in two tranches. 50% of the total loan, which will see Tern contribute $360,581, will be payable by 16 January 2018, at which time Tern's total convertible loan note position will be $511,332.
We already knew that Tern had provided a loan to DA as announced on 30 November 2017. That totalled $150,751. So on 28 December Tern was to pony up a further $360,581 by 16 January, yet its FY17 Accounts show that in fact £382,436 had been paid. At an exchange rate of $1.35 to the £, that means that Tern had forked out $516,288 by FY17: near enough the total sum not due until mid-January. Is that because DA couldn’t pay its wages, and the announced completion date was a smokescreen? Does that not suggest a cash-crisis at DA?
We already know that a fundraising in the US for DA was pulled: the original proposed fund was struck off and the replacement is yet to be formed, and had at the last count raised zero. We also know that Tern issued a profit warning in relation to DA in that 2017 revenues impacted by delays in both customer implementation schedules and customer restructuring.
We have seen RNS after RNS announcing new deals and partnerships for DA, but it looks horribly as though there is no cashflow inwards.
Let us move on through Note 20 to Tern’s FY17 Accounts. Next up we see that:
flexiOPS Limited, a company wholly owned by Tern, is also considered a related party. During the year Tern invoiced flexiOPS £60,000 (2016: £30,000) in respect of management services. As at 31 December 2017 Tern was owed £6,000 in trade receivables by flexiOPS Limited. Tern has also provided a working capital loan to flexiOPS Limited. As at 31 December 2017, £20,000 was outstanding (2016: nil).
So once again the investee company hasn’t paid all of its bill to Tern, with £6,000 outstanding and £20,000 of a working capital loan on top. So flexiOPS is a cash-guzzler too: was it on the brink of insolvency at FY17?
Next up, and perhaps most extraordinary, we see this:
InVMA Limited, a company in which Tern has a 50% shareholding, is also considered a related party. During the year, Tern invoiced InVMA Limited £67,651 (2016: nil) in respect of management and legal services. As at 31 December 2017 Tern was owed £81,181 in trade receivables by InVMA Limited.
Well hang on! Tern billed InVMA £67,651 for management and legal services and at year end was owed £81,181! Does that not suggest that Tern plc has been paying InVMA’s own liabilities? And that all in three months since it was acquired by Tern! That, in turn, suggests that InVMA’s cashflow is a complete mess. Was it on the brink of insolvency?
Finally, we are told:
Wyld Technologies Limited, a company in which flexiOPS Limited has a 90% shareholding, is also considered a related party. During the year Tern invoiced Wyld Technologies Limited £1,333 (2016: nil). As at 31 December 2017 Tern was owed £1,533 in trade receivables by Wyld Technologies Limited.
These are very small amounts, but again we see that Tern has invoiced Wyld for less than the amount owing at year end. Was Wyld so strapped for cash that Tern had to pay a £200 invoice for it? Again, one wonders whether Wyld was on the brink of insolvency.
Between these four investee companies, Tern looks to have been owed £12,000 by DA, £6,000 by flexiOPS, £81,181 by InVMA and £1,533 – a total of £100,714 – all of which is classed as trade receivables from companies which look to me to be unable to pay up. On top of that we have £402,436 of loans (to DA and to FlexiOPS) also classed as Trade and Other Receivables. That is a total of c. £503,000 which surely is highly questionable.
How sure can Tern be of getting repaid within the year? I suggest there is no certainty at all: what a complete and utter shambles!
Now let us turn to the Balance Sheet of Tern as at FY17. Here we see £274,000 of cash (good…) and £576,849 of trade and other receivables. But surely there has to be a huge question hanging over £503,000 of those receivables!
With payables of £277,164 listed under current liabilities, that could leave Tern with net current assets of about £70,000 if those receivables don’t come in. Then we have over a Bernie in Administrative and other expenses during FY17: how is that a going concern? If that is repeated during FY18, Tern finished the year with a need for £1 million in order to last to the end of December this year.
More to the point, it seems that four of its investee companies were suffering a cash crisis – at the same time as Tern. To have one investee company struggling for cash is difficult enough, but four of them?
Tern has recently raised £1.75 million and now a further (as of yesterday) £700,000 yesterday and invested c. £800,000 in a new investment. If we assume 5% expenses (perhaps generously) with the two share issuances, that suggest about £2.3 million coming in but £800,000 going out, leaving Tern with £1.5 million left over.
Since the FY17 year-end, Tern also drew £550,000 in death spiral funding and completed a placing for £650,000 (on top of the two placings above. That might have helped the cash position, but the company also handed out £125,000 to InVMA in January (a company which Tern tells us had £1 million committed sales orders in 2017 yet appears to have needed Tern to pay its bills for it!) and a further £125,000 in April. It also handed over $360,581 (around £260,000) to DA in March. That lot comes to £1.2 million in (less expenses) and £510,000 out.
Add those two last paragraphs together and Tern seems to have about £2 million to play with from that lot, but perhaps £1 million needed to get through the year even before making any further investments.
So Tern has £1 million available, after paying its own bills to the year-end? Well hang on: it is committed to ponying up a further £375,000 to InVMA by the end of July (and I’ll bet it needs more, given that it hasn’t been able to pay its bills to FY17). That leaves just £625,000 or so.
And then there is DA. Even the ramptastic financial snapshot offered last year by US Capital Partners (in its offering for the defunct DA placing) shows a net LOSS of $2.3 million for this year, on revenues of $5.1 million. Yet we know the income did not flow during FY17 as hoped and Tern has given no financials this year, suggesting that all is not well.
So will Tern have to find $2.3 million for Device Authority this year? Even if Alsop Louie ponied up half of it (and somehow I doubt it will), Tern looks to me like it hasn’t the cash.
I don’t know who forked up for the £1.75 million and £0.7 million placings at 18.5p, but they look set to be sorely disappointed. Tern had four companies clearly in financial trouble at FY17. The problem is that financial troubles have a nasty habit of spreading, and it is clear that Tern needs to raise an awful lot more cash before its position is secure. Roll on the next placing…..and the one after that, and the one after that.
And yesterday Tern told us that it wants to find another five investments!
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