The Tanfield Group Plc

("Tanfield", "Group", or "the Company")

 

Final Results for the year ending 31 December 2013

 

 

Tanfield Group Plc, a "passive" investment company as defined by AIM Rules announces its final results for the year ending 31 December 2013. The audited financial statements are being posted to shareholders and are available on the Company website at www.tanfieldgroup.com.

 

Highlights

 

·     Disposal of 51% of Snorkel.

·     Closure of Tanfield Engineering Services Limited.

·     Change from manufacturing entity to investment company .

·     Only remaining assets, passive investments in Snorkel International Holdings and Smiths Electric Vehicles Corp.

·     Strategy adopted to distribute to shareholders any cash or other proceeds received by the Company from any future realisations or monetisation of these holdings;

 

Current Status

 

 

 

Jon Pither, Chairman of Tanfield, said:

 

"It is with some mixed emotions that I review the past twelve months but with a certain optimism that I look to the future.  Those twelve months need to be put into the context of the past five years. The context is that the company went through the most difficult trading period and the deepest recession ever experienced in its market for industrial products. It is a credit to all the people involved that the businesses, in their various guises, continue to operate and that Tanfield continues to be a shareholder in these businesses.

 

Tanfield Group plc has gone through a radical structural change from being a strong manufacturing entity to being an investment company. This process of change is a response to the circumstances that the company faced during those five difficult years. We have managed to survive with a reasonable level of shareholder value intact and I am confident that our investments have the potential to provide a future return to shareholders."

 

 

Investment Report

 

Background

 

The Company is currently defined as an investment company with two passive investments. This definition resulted from the disposal of Smith Electric Vehicles in 2009 and the disposal of Snorkel in October 2013.  Tanfield Group plc currently owns (24%) of Smith Electric Vehicles Corp. ("Smith") and (49%) of Snorkel International Holdings, LLC ("Snorkel"). The Directors believe that these investments have the potential to provide a return of value to shareholders over time.

 

The strategy of the Company in relation to these investments is to return as much of the realised value in these investments to shareholders as and when they occur.

 

In line with it being defined as a passive investment company, Tanfield does not hold Board seats in Smith or Snorkel. However the Company continues to hold the right to two seats on the Board of Smith.

 

The Company has significantly reduced its cost base commensurate with its change to an investment company. 

 

Overview

 

Tanfield Engineering Services Limited

 

Through a process of administration this loss making business was disposed of in November 2013. We are pleased to say that a significant number of jobs were saved. As a result of an increase in working capital the business is developing, although Tanfield no longer has an ongoing interest in this business.

 

 

Snorkel

 

The Snorkel business continues to progress well over the six months that it has been in new ownership. The new entity is a limited liability corporation incorporated under the laws of the State of Nevada, with Tanfield owning 49%.  Production is increasing and the business is taking advantage of the general uplift in the market for its products. The new partners in the business have invested a significant level of working capital into the company, currently totalling in excess of $30 million. This has meant that supplier constraints are being alleviated and that production is ramping up in line with the increasing demand. The order book has risen by over 200% in the past six months. The annualised run rate of sales has now reached over $100 million. A planned restructuring is taking place to further reduce the breakeven of the business.All the positives regarding order book, output and fixed cost reduction mean the business is moving towards meaningful profitability. The Board are satisfied that significant progress continues to be made.

 

Valuation of Snorkel holding

 

The Board of Tanfield have taken a view of the carrying value of its 49% holding and its preferred interest holding ( Loan note)  that takes account of risks in the industrial global markets and the normal cycles that operate with these markets.  The range of potential valuation can be broad. The decision has been made to carry a prudent valuation. This valuation has been assessed against a number of criteria using discounted cash flow in relation to the sale and purchase agreement and its valuation formula:

·      Level of investment in working capital.

·      Capital investment.

·      Production capacity.

·      Order Book.

·      Market conditions.

·      Historical capability of the business to ramp up output.

 

Taking into consideration these factors, the carrying value of the Snorkel holding has been assessed as £36.28 million ($60.1 million).

 

 

Smith Electric Vehicles

 

Smith is pursuing a business strategy of combined manufacturing and licensing of its technology in markets outside of North America. It has been realigning its business in this context. The Tanfield Board understands that there are a number of potential licenses currently in negotiation.  Smith has downsized its manufacturing operation and proposes to create smaller manufacturing units in various locations to accommodate demand. It is in a position, having raised the appropriate working capital, to instigate its material and component cost down plan. This will mean the realisation of a competitive pricing strategy and the aim of achieving sustainable profitability. If Smith can achieve its listing plan, the Smith Board feel that the potential of the business, in its recapitalised form, is very strong. 

 

Current position of Smith

 

As announced on 12 May 2014, an agreement was reached between Smith and Sinopoly Battery Limited ('Sinopoly') for a strategic investment commitment in Smith. The investment will come in 3 tranches.  The first tranche (which has been completed) was for $2 million in secured debentures. The second tranche is $10 million in preferred stock, as part of a minimum $20m to maximum $30m issuance of preferred stock by Smith, subject to, inter alia, the execution of a battery supply contract and Component Supply Memorandum of Understanding between Smith and Sinopoly. The third tranche is to subscribe for $30m of common stock subject to, inter alia, a US National Exchange Listing. The agreement is subject, inter alia, to Sinopoly shareholder approval.

 

As announced on 20 May 2014, the Tanfield Board signed an agreement with Smith  which conditionally binds it to sign certain consents to allow Smith to raise funding up to $30 million and to restructure the capital of the company. The Smith Board plan is to convert substantially all debt into common stock prior to listing on the Over-the-Counter Bulletin Board ('OTCBB') and simultaneously raise up to $30 million. It is then proposed that Smith seeks a full listing on a U.S. National Exchange.

 

The agreement covers the following:

 

Debt: The total debt owed by Smith to Tanfield Group will be consolidated into the AA round of funding which has rights to a 30% uplift on conversion to common stock. Conversion will occur immediately prior to the issuance of Series E Preferred stock and closing of the Qualified Merger  (listing on OTCBB).

 

Warrants:  Smith will issue Tanfield 5,050,017 warrants at an exercise price equal to post-money valuation at the closing of the Series E  Preferred stock and 5,050,017 at an exercise price equal to the post-money valuation at the closing of the post-merger financing or underwritten public offering. The warrants will be exercisable within 6 months of issuance and carry a term of 2 years.

 

As a consequence of the agreement and as a current common stock holder in Smith, Roy Stanley, will receive two tranches totalling 3,997,600 warrants on the same terms. Mr Stanley is assigning the rights to these warrants to the Company for nil consideration for the benefit of the Company and its shareholders.

 

In aggregate, the total number of warrants to be issued to Tanfield including those assigned to Tanfield are expected to amount to just under 2% of the issued share capital at the time of the OTCBB listing.

 

Public Company Merger

 

The Board of Smith has executed a Letter of Intent with an OTCBB company and has conducted due diligence for the proposed merger of Smith into the company.  It is anticipated, assuming funds are raised, that the listing will take place by the end of June 2014.

 

Proposed subsequent flotation on a US National Exchange

 

Subsequent to the proposed merger it is intended to apply for a Listing on a US national exchange. The company intends to complete a minimum of a $40 million underwritten offering in order to satisfy the waiver of the one year seasoning requirement relating primarily to applicant companies having been traded on another exchange and the reporting of information. Subject to meeting the other requirements of NYSE or NASDAQ, it is proposed that Smith will apply to list on NYSE or NASDAQ upon completion of the offering. The Company is in the process of negotiating with an underwriting Bank. It is anticipated that this listing will be effective within 90 days to 120 days from the OTCBB listing.

 

Value to Tanfield Group

 

It is estimated that post-merger (listing on OTCBB) Tanfield will hold between 4% and 5% of Smith shares, (excluding warrants) based upon a post money valuation of $275 million. The ultimate holding post the public listing on a US National exchange will depend on the price at which any money is raised at that point.

 

The shares in the OTCBB entity will not be tradable for 180 days. Shares in the entity listed on the National exchange will be tradable on the ending of this 180 day period.

 

The Tanfield Board takes the view that although there is still a risk of failure in the plan that this risk has diminished.  On balance it remains positive that supporting this plan represents the best possible outcome for all stakeholders of Smith, including Tanfield. The Tanfield Board considers that in entering this agreement it has sought to fulfil its obligation to its shareholders in seeking to optimise the value on its investment in Smith. 

 

Valuation of Smith holding

 

Currently Tanfield  has a carrying value of £1.28m ($2.11m) for its equity investment in Smith and this has been the carrying value since its disposal by the Company in 2009. Depending upon the ongoing viability of Smith, the realisation of value may be higher than its carrying value but because of the risks attached to the viability of Smith the Board feels that it is prudent to maintain its current carrying value.  The future value of Smith will depend upon its performance and its reception as a public listed entity. In addition Tanfield has loans and other debts outstanding due from Smith totalling £2.86m ($4.70m)

 

 

Strategy of Tanfield Board in relation to its current Investment

 

It is the aim of the Tanfield Board to return any value realisation from its investments in Smith and Snorkel to shareholders as soon as these events occur and circumstances allow.

 

Review of Investment Strategy

 

The Company is currently defined as an investment company with two passive investments. This definition resulted from the disposal of Smith Electric Vehicles in 2009 and the disposal of the Snorkel division in October 2013.  Tanfield Group plc currently owns (24%) of Smith and (49%) of Snorkel. The Directors believe that whilst these investments will result in a return of value to shareholders over time that there is an opportunity to further enhance the potential value to shareholders.   Accordingly, the Directors believe that it is in the Company's interests to adopt an amended strategy for the development of the Company as a broader investing company as set out below and for which it will seek shareholder approval at its forthcoming AGM.

 

The Board intend to "ring fence" current funds to preserve the continuity and value in its existing investments. The strategy of the Company in relation to these investments is to return as much as possible of the value in these investments to shareholders as and when it is realised.

 

The Company would therefore raise money to acquire and fund any new investments. Where appropriate it will use a small proportion of its shares and cash (excluding existing funds) to acquire or invest in businesses in the technology sector. Any new fundraising for such a purpose will be subject to shareholder approval. The Company intends to issue a circular in the near future informing shareholders of an open offering to all shareholders of up to £2m at the same time as giving notice of its AGM.

 

The Directors believe that this approach is a way of not only increasing shareholder value but also of spreading risk in relation to the realisation of current investments.

 

Proposed New Investing Policy

 

The Company will put forward the following revised Investing Policy at its forthcoming AGM. Further details of the AGM will be published shortly in its AGM notice in due course.A copy will be available on the Company website and an announcement made once it has been published.

 

Tanfield Group Plc is classified as an Investing Company.  The Company does not have and will not make cross-holding investments.  The Company does not have a policy on gearing.

 

The Company has a 49% membership interest in Snorkel International Holdings and a 24% interest in the shares of Smith Electric Vehicles Corp (together the "Existing Investments").  Under its Investing Policy, the Company holds the Existing Investments and may seek to make further investments in the technology sector ("New Investments").

 

Existing Investments

 

The Existing Investments are passive investments. It is the intention that where distributions are received from or realisations made of the Existing Investments (or there is a receipt of marketable securities) that these are distributed to shareholders, subject to compliance with any legal requirements associated with such distributions.  There is no limit on the amount of time the Existing Investments are to be held by the Company.

 

New Investments

 

The Directors of the Company intend to identify and, subject to the availability of financial resources to do so, make New Investments in any company or asset within the technology sector offering the potential to deliver a favourable return to shareholders either through distributions or capital gain.  The Company's equity interest in a New Investment may range from a minority position to 100%. ownership. New Investments may be either in quoted or unquoted companies and may also include debt, convertible securities or joint venture structures. New Investments are not to be subject to limits upon concentration or diversification, and may be held for any period of time.  The Directors intend to be either active or passive investors in New Investments as appropriate.

 

 

New Registered Office

 

The Company has changed its registered office to Sandgate House, 102 Quayside, Newcastle upon Tyne, Tyne and Wear NE1 3DX

 

 

 

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2013
					2013	2012
					£000's	£000's
Revenue					2,223	3,250
Staff costs					(2,606)	(2,100)
Depreciation and amortisation expense					-	-
Other operating expenses					(679)	(2,469)
Loss from operations before impairments					(1,062)	(1,319)
Impairment of Investments					(1,357)	(2,323)
Intercompany loan forgiveness Adjustment to fair value of investments					(17,141) 26,984	(9,787)
Profit/(loss) from operations after impairments					7,424	(13,429)
Finance expense					(80)	-
Finance income					48	71
Net finance (expense) income					(32)	71
Profit/(loss) from operations before tax					7,392	(13,358)
Taxation					-	-
Profit/(loss) & total comprehensive income for the year attributable to equity shareholders					7,392	(13,358)
Earnings/(loss) per share
Earnings/(loss) per share from operations
Basic (p)					5.4	(11.0)
Diluted (p)					5.3	(11.0)

 

BALANCE SHEET (Company registration number 04061965)

AS AT 31 DECEMBER 2013

 

	2013	2012
	£000's	£000's
Non current assets
Non current Investments	37,563	1,280
Investments in subsidiaries	-	10,685
	37,563	11,965
Current assets
Trade and other receivables	2,902	19,002
Deferred consideration	349	339
Cash and cash equivalents	375	402
	3,626	19,743
Total assets	41,189	31,708
Current liabilities
Trade and other payables	1,885	1,915
	1,885	1,915
Non-current liabilities
Deferred tax liabilities	-	-
	-	-
Total liabilities	1,885	1,915
Equity
Share capital	6,975	6,450
Share premium	16,262	14,823
Share option reserve	1,904	1,885
Special reserve	66,837	66,837
Merger reserve	1,534	1,534
Retained earnings	(54,208)	(61,736)
Total equity	39,304	29,793
Total equity and total liabilities	41,189	31,708