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Tern – more cash to bottomless pit Device Authority

By Nigel Somerville, the Deputy Sheriff of AIM | Friday 14 September 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 jam-tomorrow investment company Tern (TERN) has announced, as predicted HERE, yet another loan to its principal investee company, Device Authority (DA) – this time for $525,000 (around £400,000) which, we are told, is repayable on 31 December 2018 or convertible into shares if DA ever gets a fundraising away.

This marks an increase in Tern’s funding of DA: in June it lent DA $303,954 and in March is ponied up $360,581 to add to the $360,581 handed over in a hurry at the end of December. Now we have moved form $300-odd thousand per quarter to $525,000 per quarter.

And the partners seem  to be getting a little bit shy: the December and March tranches of $360,581 were part of a loan package worth $1,688,684 – so Tern was contributing 43% of the funding. In June Tern stood its corner for 71.5% of loan monies. This morning Tern has contributed 72% of loan monies advanced. So has Alsop Louie become a tad reticent, or has another shareholder shut up shop?

Here we are more than a year on from the fanfare announcement of an equity fundraise for DA in the USA for up to $10 million, with a minimum of $2.5 million, out of which Tern was supposed to be getting $2 million and so far Tern has had to hand over $1.7 million  - and the DA fundraise has been quietly dropped, as have the ramptastic projections of turnover for DA this fundraise which never happened was going to bring.

We are told that if Tern is repaid in cash it will receive 300% of the principal amount (if DA can raise the cash!) – quite an uplift. Surely an equity raise would have been a better solution given the implied interest rate in just 3 ½ months! But it seems that nobody wants to hand over cash other than Tern and fellow investors.

It is a situation which would make Neil Woodford proud.

So once again we have a loan repayable within a short period of time – so it counts as a current asset, but I’ll bet nobody has a scoobie how DA can repay it in cash by Christmas. And the eye-watering interest if DA cobbles the cash together somehow to repay Tern by Christmas suggests that the risk here is acknowledged by everyone as being extremely high – hardly surprising given that the ramptastic revenue projections of last year morphed into:

 2017 revenues impacted by delays in both customer implementation schedules and customer restructuring but that the majority of the previous revenue target is now anticipated to fall in H1 2018.

….and then were kicked into the long grass a few days after a placing which left the company open to suggestions of securities fraud.

I suggest that the truth is that DA still has no revenue worth writing home about and Tern’s co-investors are not keen to carry on throwing good money after bad. Tern, on the other hand, has no option but to continue to fund DA because its share price is a vast multiple of NAV – and that is because the market believes DA is a goldmine, rather than a bottomless pit.

Even better, next week Tern has promised its interim results and Device Authority’s results for the year to December 2017 are due at Companies House by the end of this month. After all the RNSs announcing partnership for DA with no revenue numbers, one has to wonder whether DA’s numbers will arrive some time after Tern’s. Whatever, the interim numbers will be a hoot, I suggest.

With a nice portion of cash already gone from Tern’s placing at 26p it is not quite yet time to start asking when the next pacing will be. But I reckon by year-end more cash will have gone into DA, the repayment dates will have been extended yet again (but will remain short enough to count as current assets, even though there is still no sign of how DA can ever repay at all) and Tern will be rattling the tin.

Still a SELL.

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