TERN Tern Plc

30 May 2024

Tern Plc

("Tern" or the "Company")

Audited results for the year ended 31 December 2023

Tern Plc (AIM: TERN), the investment company specialising in supporting high growth, early-stage, disruptive Internet of Things ("IoT") technology businesses, announces its audited results for the year ended 31 December 2023.

Highlights

·    Net assets of the Company at 31 December 2023 of £12.3m (31 December 2022: £24.9m). The net asset value per ordinary share as at 31 December 2023 decreased to 3.2p (31 December 2022: 6.4p).

·    The reduction in net assets of the Company as at 31 December 2023 of £12.6m is principally due to movements in investments held at fair value through the profit or loss of £11.0m, and a reduction in the Company's cash balance of £0.6m.

·    The unaudited aggregated annual recurring revenue ("ARR") of our holdings¹ increased by 50% from 2022 to 2023 (97% from 2021 to 2022).

·    The aggregated employee numbers in our holdings decreased by 1% from 2022 to 2023 (increased by 66% from 2021 to 2022), however this decrease was balanced by an associated increase in ARR such that ARR per employee increased by 51% (19% from 2021 to 2022).

¹Our 'holdings' includes the positions we hold in our portfolio companies and the publicly traded Wyld Networks AB:  Our portfolio at the end 31 December 2023 included: Device Authority Limited, InVMA Limited (trading as Konektio, from 5 March 2024 InVMA Limited was no longer included in the portfolio), FVRVS Limited (trading as FundamentalVR) and Talking Medicines Limited, collectively 'our portfolio': as further described in the section headed 'Portfolio Companies and Holdings' below and as detailed in note 2 to the accounts. 

Availability of Annual Report and Notice of AGM

The annual report for the year ended 31 December 2023 will shortly be available from the Company's website https://www.ternplc.com/investors  and will be posted to shareholders today.

The Company's Annual General Meeting ("AGM") will be held at 9.30am on Thursday 27 June 2024 at the offices of Allenby Capital, 5 St Helen's Place, London, EC3A 6AB. The notice of AGM will shortly be available from the Company's website https://www.ternplc.com/investors and will be posted to shareholders today, together with the form of proxy.

Enquiries

Chairman's Statement

Whilst market conditions remain challenging, I am pleased to report that 2023 was a year of significant underlying progress for Tern and the majority of its portfolio companies.

We are an AIM-quoted provider of venture capital ("VC") to exciting Internet of Things companies, seeking to create value from investing in disruptive start-ups not generally available to AIM investors. This model gives our shareholders the opportunity to effectively act as Limited Partners (LPs), akin to the capital model in a traditional VC fund, but with the benefit of daily liquidity for your holding on the London Stock Exchange and no obligation to provide further capital.

Tern has built a portfolio of high-growth businesses where we see opportunities in sectors poised for substantial growth. We actively drive significant value creation from the organic growth of our companies and seek well-timed exits to realise a high return on the investment in due course.

Regrettably, the historically least successful company in our portfolio, InVMA (trading as Konektio), has recently entered administration and its value has been written down to zero. During 2023 we had lost confidence in this company to the extent that we declined to participate in its last investment round following which other existing, established shareholders followed suit.

Despite the fair value decrease, our portfolio is not just surviving, but thriving - a performance that I believe is much better than most early-stage investment portfolios in their space.

·    Device Authority has raised significant new funds from an industry specialist investor allowing it to fully capitalise on its industry recognised technology and build on its partnerships with Microsoft, Entrust, Cybertrak and PTC.

·    Wyld Networks has strong relationships with the European Space Agency, Eutelsat, Bayer Crop Science and Thales and has signed deployment deals in Saudi Arabia, Australia, Argentina and Brazil.

·    FundamentalVR's revenue and gross margin have continued to improve in 2023. The company has made significant progress in expanding its contracted annual recurring revenue. Apple's continued expansion of activity in the metaverse space and Meta's global advertising campaign which featured FundamentalVR are both significant opportunities for the company.

·    Talking Medicines is currently exceeding its management's forecasts. They have secured partnerships with for example data aggregator Socialgist, published with Sermo Physician Community and signed contracts with multiple US based Healthcare Advertising Agencies/Advertising Holding Companies that serve Pharmaceutical Companies.

Each of these companies and their services have developed into recognised technology leaders in their targeted markets and are now firmly into their growth stage.

Unlike in the traditional VC model, Tern provides more than just funding; it proactively supports the growth of its portfolio companies. Organic delivery has been strong, with significant commercial traction and growing recurring revenues, a key metric in establishing value for a trade sale, IPO or secondary buyout by another venture/PE backer.

During the year, we have taken the opportunity to increase our efficiency by significantly cutting our operating costs by 40%, halving our senior leadership team from four to two, and moving to a lower cost office.

However, we do need to retain the ability to continue to support our portfolio companies, especially successful ones, as they grow, otherwise we are at risk of being disproportionately diluted as they raise further funds. We always look for ways of realising capital from our portfolio where appropriate, but Tern also needs to retain the ability to issue new ordinary shares as the need arises.

It is worth noting that we have invested in each of our portfolio companies at an early-stage - in most cases before they had developed their products or built any meaningful routes to market. What each of them had demonstrated to us was exciting opportunities to develop new high growth businesses. We have, and continue to, invest significant time and effort with these companies to ensure that they create effective business models, grow their team effectively, and develop their market opportunities.

In particular, your Company gains notable value from the enormous experience of Bruce Leith and Al Sisto as veteran experienced technology entrepreneurs over many years, and particularly Al Sisto, who is based in the USA, and is embedded in current business development cultures there. This has enabled us to build strong US-based trading businesses for most of our portfolio companies, operating effectively in the world's strongest technology market.

Our goal is to build value in these businesses. Unlike other VCs we do not load management fees onto our companies, as we want them to use all their resources to grow in value. In addition, companies in these growth stages are not in any position to pay dividends - our return comes when we achieve a liquidity event. Thus, we strive to ensure that the value of our portfolio companies grow by at least 20% per year and when we do realise the value in these businesses (by trade sale or public listing) our goal is to return significant value to our shareholders, after taking into account the need for reinvestment in our portfolio. Whilst the carrying values of our portfolio companies at the year-end do not reflect this targeted annual increase in value, reflecting the required valuation methodology for our audited accounts, I believe that the true value that will ultimately be realised will be far higher.

One of the key characteristics of early-stage deep tech investments is that we have very little control of when a liquidity event is likely to emerge. What we must do is ensure that our companies continue to present significant value to an acquiring corporation. Also, in the ups and downs of the technology economies, there are seasons where acquisitions and public listings can happen, and other seasons where it is very difficult to achieve a good price. In these circumstances we must 'wait it out' until a good price can be achieved.

It is the Board's intention that the Company will not invest in any companies or entities not already part of Tern's existing portfolio until such time as the Company has realised material value from its current portfolio.

We consider that holding shares in Tern should therefore always be seen as a long-term investment. If our companies are growing well, as they are, the value should eventually be realised, and our shareholders will benefit from the funds received.

Our current portfolio has been working well, evidenced by the ability of every one of them to either achieve a listing on a stock market (Wyld Networks on NASDAQ First North Growth Market), or to raise later stage investment from new independent third-party investors (Device Authority, FundamentalVR, Talking Medicines). These achievements have been even more impressive by occurring during a challenging time for tech companies to raise capital, indicating that our positive confidence in the excellent potential of our companies is shared by other sources of risk capital.

I would also like to take the opportunity to recognise the outstanding performance of our senior leadership team during this year. We are very much a 'hands-on' team who actively participate in the strategy and development of our various investment companies. I would also like to thank my fellow non-executive directors, Alan Howarth and Sarah Payne, who changed role from CFO to non-executive director in September 2023, for their excellent judgment and advice.

In short, a stake in Tern should be seen as an ability to participate in the development of attractive businesses generally not available to private investors whose growth, with our guidance and access to our network of resources, is aimed at providing long-term capital gains.

It is our job to ensure that we work to achieve the strongest return for your investment, and we assure you that we will continue to make that our principal goal.

Ian Ritchie CBE, FREng, FRSE

Chairman

Financial Review

All sectors, excluding energy, saw a decline in venture investing and valuations during 2023 from higher valuations and catch-up investing post Covid in 2021. This valuation adjustment flowed through to some of our portfolio companies and holdings. However, with the exception of Konektio, further details of which can be found below, our portfolio continued to focus on their fundamentals, showing growth through the period with a focus on maximising growth of annual recurring revenue.

Statement of Financial Position

Net assets at 31 December 2023 were £12.5m, a reduction of £12.4m from the net assets of £24.9m at 31 December 2022. This is principally due to movements in investments held at fair value through the profit or loss ("FVTPL").

The negative impact of foreign exchange movements at Device Authority and Wyld Networks add to the decreases in the fair value of the portfolio leading to an overall decrease in our investments of £11.1m. Our cash balance was £0.6m lower at 31 December 2023 compared to 31 December 2022. Whilst our administration costs and other expenses declined in 2023 compared to 2022, we received no proceeds from the issue of new shares in 2023. Trade and other payables is £0.3m higher at 31 December 2023 compared to 31 December 2022.

Investments held at FVTPL of £12.8m relate to our portfolio of high- growth technology companies. During the year, the fair value of this portfolio decreased by £11.1m, resulting from investments made of £1.4m, disposal of assets of £1.5m, foreign exchange decrease of £0.3m and a negative movement in the fair value of investments held at FVTPL of £10.6m.

Income Statement and Statement of Comprehensive Income

The total comprehensive loss for the year was £12.5m (2022: loss of £10.4m), primarily due to a net negative movement in the fair value of investments held at FVTPL of £10.6m.

The Company seeks to keep its fees charged to portfolio companies at modest levels, as the Company's preference is for capital to instead be reinvested in the portfolio to drive value creation.

Administration costs decreased to £1.7m in 2023 (2022: £1.8m). Other expenses decreased to £0.1m in 2023 (2022: £0.4m).

Statement of Cashflows

During the year, £1.4m was used in the Company's operations, £1.2m deployed within our existing portfolio, via equity and loan investments.

A £0.5m loan was provided to the Company during the year and £0.1m was repaid.

Key performance indicators

The Company's financial Key Performance Indicators ("KPIs") are focused on increasing net asset value, increasing net asset value per share and delivering consistent revenue growth of our portfolio. The Company also monitors non-financial KPIs, the primary focus being on the increase in employee numbers and revenue per employee in our portfolio which is an indicator of growth to support commercial success. These indicators are monitored closely by the Board and the details of performance against these are given below.

The return on investments

Unrealised fair value:

·    Wyld Networks: £2.4m valuation (31 December 2022: £6.0m): The equity valuation has decreased due to a realisation of £1.5m in disposed Wyld Networks shares, the reduction in Wyld Networks' market capitalisation of £2.0m (reduction in share price) plus an exchange rate loss of £0.05m;

·    Device Authority: £4.4m valuation (31 December 2022: £11.9m): The valuation has decreased due to a fair value reduction of £7.6m, including a foreign exchange rate loss of £0.2m. The valuation decrease arose from applying Device Authority's latest fundraise valuation. The convertible loan notes of £0.7m provided by Tern to the company was converted to equity in December 2023. (For further details on Device Authority, please see note 2);

·    Konektio: Nil valuation (31 December 2022: £0.5m): The equity value of Konektio was written off due to the company entering into administration;

·    FundamentalVR: £3.6m valuation (31 December 2022: £3.6m): The valuation has remained static;

·    Talking Medicines: £2.0m valuation (31 December 2022: £1.8m): The valuation has increased due to additional funding provided to the company of £0.2m via CLN which was outstanding at the year end;

·    Diffusiondata (previously Push Technology): £0.02m valuation (31 December 2022: £0.02m): The investment is valued at fair value with the price of the most recent valuation taken into account; and

·    SVVUK: £0.3m valuation (31 December 2022: £0.1m): The investment is valued at fair value at the value provided by the SVVUK fund. The fair value decrease of £0.1m was offset by the Tern investment of £0.3m.

Wyld Networks valuation is determined by reference to the appropriate quoted market price at the reporting date.

The global downturn in technology company valuations and multiples applied to early-stage businesses was taken into consideration when assessing the fair value of the portfolio.

The net assets of the Company at 31 December 2023 showed a reduction to £12.3m (31 December 2022: £24.9m). The net asset value per ordinary share as at 31 December 2023 decreased to 3.2p (31 December 2022: 6.4p).

The year-on-year unaudited annual recurring revenue ("ARR") of our portfolio companies (level 3 investments) increased by 50% from 2022 to 2023 (97% from 2021 to 2022).

The Company has non-financial KPIs which are also monitored regularly by the Board. The non-financial KPIs are focused on the growth in employee numbers in our portfolio. We believe these factors help serve as leading indicators of the future performance and our impact on our stakeholders:

Employees in our portfolio companies decreased by 1% from 2022 to 2023 (increase of 66% from 2021 to 2022), however this decrease was balanced by an associated increase in ARR such that ARR per employee increased by 51% from 2022 to 2023 (19% from 2021 to 2022).

Portfolio Companies and Holdings as at 31 December 2023

Wyld Networks AB (publ) ("Wyld Networks" or "Wyld")

Valuation: £2.4m (31 December 2022: £6.0m)

Holding: 22.5%*

Wyld Networks, quoted on the NASDAQ First North Growth Market in Stockholm, enables affordable connectivity across the globe in areas where wireless coverage is unavailable. The company specialises in providing wireless connectivity between IoT sensors and Low-Earth-Orbit ("LEO") satellites supporting ISM, S and L band spectrum with its Wyld Connect solution for governments and businesses. The company has expanded its portfolio in launching Wyld Fusion a hybrid terrestrial and satellite IoT platform

Wyld Networks CEO, Alastair Williamson said: "As we continue to move further into our commercialisation phase, we are appreciative for the continued support and guidance that Tern provides, helping us promote the company and our solution, navigate the challenges and capitalise on the further opportunities that lie ahead."

*Pursuant to Tern's funding facility announced on 12 June 2023, under which £418,205 was the balance outstanding as at 31 December 2023, Tern is required to maintain in escrow shares in Wyld at a value of not less than 1.5 times the value of outstanding amounts drawn down and accrued interest, as security for the Facility.

Device Authority Limited ("DA" or "Device Authority")

Valuation: £4.4m (31 December 2022: £11.9m)

Equity ownership: 35.7% (before any dilution on exercise of share options)

Device Authority is a pioneering force in Identity and Access Management (IAM) tailored for interconnected device ecosystems, empowering organizations to realize 'Zero Trust' security on a comprehensive scale. In the realm of security, Zero Trust demands unwavering authentication, authorization, and ongoing validation of all users, irrespective of their network positioning, ensuring their adherence to stringent security configurations and postures prior to accessing applications and data. Central to this paradigm is Device Authority's acclaimed KeyScaler® platform, meticulously crafted to streamline and automate the management of IoT machine identities across their complete lifecycle. By furnishing end-to-end trust in devices, data, and operational integrity, KeyScaler® epitomizes a cornerstone in fortifying organizational security frameworks.

Device Authority CEO, Darron Antill said: "Last year saw key breakthroughs for Device Authority, as winners of the Microsoft Global award and developing our Enterprise class SaaS platform (KSaaS) to meet demand and the shift in consumption models from customers. Working with Board and our lead investor Tern we developed a strategy to bring in new investment and particularly cyber security investors to help accelerate the company trajectory into key vertical markets."

FVRVS Limited ("FundamentalVR")

Valuation: £3.6m (31 December 2022: £3.6m)

Equity ownership: 12.1% (before any dilution on exercise of share options)

A global leader in immersive surgical training, FundamentalVR was founded with the mission to accelerate human capability in surgery and medicine through virtual technologies to improve patient outcomes. The company's innovative approach accelerates the industry shift towards digital surgery, addressing the competency gap at scale in training for intelligent operating rooms.

Its purpose-built Fundamental Surgery platform allows for full rehearsal of medical and surgical procedures, and its patented HapticVRTM technology mimics the physical touch, weight, resistance and feedback of surgical actions and accurately simulates the sensations of soft tissue, bone textures and muscle.

With over 15,000 competency-building sessions conducted globally and accredited by and affiliated with institutions like the American Academy of Opthalmology (AAO), the American Academy of Orthopaedic Surgeons (AAOS), and the Royal College of Surgeons of England, FundamentalVR remains committed to elevating performance and training skilled surgeons and Operating Room teams at scale.

FundamentalVR CEO, Richard Vincent said: "This has been an exciting year of growth and technological development for FundamentalVR as we have pushed both the spatial immersive VR and haptic capabilities of our platform and its use cases within the MedTech industry. We're thrilled with the progress we've made, and we're grateful for the steadfast support of Tern Plc, whose partnership continues to be instrumental in our journey."

Talking Medicines Limited ("Talking Medicines")

Valuation: £2.0m (31 December 2022: £1.8m)

Equity ownership: 23.8% (before any dilution on exercise of share options)

Talking Medicines harnesses Advanced Data Science and Artificial Intelligence to empower healthcare advertising agencies, enabling them to consistently secure and retain Pharma clients while achieving heightened productivity and rapid project delivery. With a vision to transform the $30 billion healthcare marketing landscape, Talking Medicines unlocks strategic intelligence embedded within conversational data. By structuring conversational data, Talking Medicines empowers customers to gain strategic advantages in analysis, measurement, and the cultivation of enhanced brand equity.

Talking Medicines' goal is to revolutionise the pharmaceutical industry with its cutting-edge social intelligence platform, PatientMetRx. By harnessing the power of artificial intelligence (AI) and natural language processing (NLP), the platform provides pharmaceutical companies with unparalleled insights into patient and healthcare providers (HCPs) experience and preferences using social data.

This allows companies to deliver a greater return on investment for marketing and to ultimately improve health outcomes for patients. With PatientMetRx, pharmaceutical companies have access to a level of scale and depth of patient insights that was previously impossible, enabling them to make data-driven decisions that drive success.

Talking Medicines CEO, Jo Halliday said: "Al Sisto and Tern have continued to add valuable support behind our strategic direction as we have grown both our AI product offering, and successfully expanded into the US market. We value this continued input and direction from an experienced team."

Diffusiondata (previously Push Technology)

Valuation: £0.02m (31 December 2022: £0.2m)

Equity ownership: <1%

Diffusiondata elevates organizations' capacity for real-time communication. This extends beyond direct interactions to encompass indirect channels, such as automatically refreshing displayed data in real-time, without necessitating user prompts for updates. Interactive applications thrive on this capability, becoming infinitely more engaging as they seamlessly update in real-time with the arrival of new data.

Sure Valley Ventures UK Software Technology Fund ("SVVUK")

Valuation: £0.3m (31 December 2022: £0.1m)

Equity ownership: 5.9%

SVVUK stands as a venture capital powerhouse, directing its investments towards a diverse array of private UK software companies, with a particular focus on the burgeoning immersive technology and metaverse sectors. This encompasses ventures involved in augmented and virtual reality, artificial intelligence, and cybersecurity. Presently, SVVUK boasts investments in two promising enterprises: RETìníZE Limited, a dynamic creative tech firm headquartered in Belfast, and Opsmatix Systems Limited, operating under the brand Jaid, an innovative technology company offering cutting-edge AI-driven human communication solutions. With an unwavering commitment to innovation, the SVVUK team remains dedicated to assessing additional investment prospects within their target sectors, including immersive tech, SaaS, cybersecurity, and IoT. Notably, many of these opportunities leverage artificial intelligence at their core, aligning seamlessly with SVVUK's overarching investment strategy.

Income Statement and Statement of Comprehensive Income

For the year ended 31 December 2023

Since there is no other comprehensive income, the loss for the year is the same as the total comprehensive income for the year.

LOSS PER SHARE: