AIM listed jam-tomorrow (or the day after) IoT investment company Tern (TERN) has released its interims to June 2018 and despite the polishing of things unmentionable they show what a car-crash had been – and still is - going on. I start by referring back to my article HERE where I believe that I showed quite clearly that Tern’s portfolio was suffering a massive cash-crisis and that Tern was picking up its portfolio companies’ bills, not receiving management payments and making loans to them – all of which had gone onto the Trade and Other Receivables and consequently had been counted in the net current assets. Had those numbers been stripped out, I believe that Tern would have had a problem with its auditors when it came to being signed off as a going concern. The point was that loans were being made with a settlement date within a year (so a current receivable) and in the case of Device Authority, more loans were then made and the repayment date moved out (but still counting as a current receivable). I would contest that there was no way Device Authority (DA) could repay: its funding round with US Capital Partners had (at best) stalled, having raised no money at all and, indeed, the entity providing the cash had not even been formally registered as a new entity, and we can guess that its income is at best negligible.
Of course, during H1 Tern raised a load of cash from placings and its death spiral (which has now been binned) to bring in £3.1 million. But a look at the interim balance sheet shows that those trade and other receivables have grown from £576,849 to a stonking £1.13 million. We know that Tern ponied up loans to DA of $0.304 million in June and $0.361 million in March – a total of $0.665 million – or around £500,000. But the trade and other receivables are up by slightly more than that, which means that bills paid by Tern on behalf of its portfolio companies as well as outstanding management fees as at FY17 still had not been settled as at June 2018. Whilst we see net current assets as at June 2018 sitting at £2.39 million, it we take those trade and other receivables out of the equation (they were, after all, entirely made up of overdue management fees, cash paid out on behalf of portfolio companies and ever-moveable loans) the net current asset position would be down to £1.26 million – and post-period Tern has paid out a further $525,000 in ever-moveable loans to DA (call that £400,000) and handed over £375,000 to InVMA. Take those into account and net current assets would be down to under £500,000 – a number easily beaten by H1 administration costs of £571,952. Shall we call that around MINUS £100,000 by year-end?
But the good news is that the share price went absolutely mad and Tern raised £2.9 million in late July at 26p – a share issue which raised eyebrows for a few days later the company ‘fessed up that DA’s forecast revenues were no longer relevant. Cough, splutter! I think it is perfectly clear that without that fundraise Tern would be in deep trouble by now. As it is, one might knock off 5% (good work, brokers) from that gross fundraise, so call that £2.75 million. Knock off my £100,000 net current assets deficit (ignoring receivables which I simply don’t believe) at year end and we are down to £2.65 million. And then think about the audit (for FY17 that was the end of March). Admin expenses for H1 of £0.572 million would suggest £1.144 million for the year – or around £95,000 a month. So at sign-off for the FY18 accounts the auditor will want to see £1.144 million of cash after taking off a year’s worth of admin to sign this off as a going concern.
Three months at £95,000 taken off cash of around £2.65 million brings us down to £2.37 million. A year’s admin off that and we are down to £1.23 million. Well, the auditor can give Tern a Going Concern thumbs up so far. But Tern has been handing cash over to DA every three months this year, the last amount being £400,000 or so. If that continues in December (as it did last year) I reckon we will see net current assets less than a year’s admin (after knocking of receivables which are cash owed by portfolio companies) down to just £0.83 million, and down to just £0.43 million at the end March. If I am right, in the absence of yet more placings, by June there will be another cash crisis.
We are told by Tern’s CEO, Al Sisto, that: Our recent activities, which include strengthening our balance sheet and making investments into new and potentially high-growth companies at attractive valuations, place us in a more solid position for the full year and beyond. Well, until next June! …we believe that we are on track to meet our goal of having a dozen companies in our portfolio by the 2019 year-end. Tern currently has six investee companies – so how is it going to pay for another six? To quote Cynical Bear, when’s the placing? Shares in Tern are (last seen) down to 16.75p (so those placees at 26p will be a bit sore), making my mid-June sell call at 43p seem somewhat prescient. But the current valuation still sits at almost £40 million, and the best jam-tomorrow that the company can offer also comes from Al Sisto: During the first six months of 2018, Tern focused on building a portfolio of exciting IoT companies in the UK that the Board believes will be attractive candidates for acquisition or IPO, with valuations between £1 million to £10 million. Hmm. So six companies which the board believes will be saleable at between £1 million and £10 million apiece, and that lot currently is worth £40 million? You're 'aving a laugh! For an investment company still facing a cash crisis within 12 months to be trading – even in the best case scenario – at the total pie-in-the-sky future valuation that the board hopes for is ludicrous. The company reminds us that NAV as at June sat at around 6p. That may be fair, but at 16.75p and with (still!) questions over funding the conclusion in clear: SELL.
Filed under: Tern, RM2, CyanConnode, Haydale, TomWinnifrith.com, Malcolm Stacey, Money Tree
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