Annual Financial Report – 15th June 2022

Annual Financial Report

15 June 2022

 

NORTHERN 3 VCT PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2022

 

Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by Mercia Fund Management Limited. It invests mainly in unquoted venture capital holdings and aims to provide long-term tax-free returns to shareholders through a combination of dividend yield and capital growth

 

Financial highlights (comparative figures as at 31 March 2021):

 

              2022              2021
Net assets £106.9m £117.5m
Net asset value per share 97.9p 107.0p
Return per share:    
Revenue 0.4p 0.5p
Capital (0.5)p 33.4p
Total (0.1)p 33.9p
Dividend per share for the year:    
Interim dividend 2.0p 2.0p
Second interim (special) dividend

Proposed final dividend

3.0p

4.5p

2.5p

Total 5.0p 9.0p
Cumulative return to shareholders since launch:    
Net asset value per share 97.9p 107.0p
Dividends paid per share* 108.4p 99.4p
Net asset value plus dividends paid per share 206.3p 206.4p
Mid-market share price at end of year 94.5p 91.0p
Share price discount to net asset value 3.5% 15.0%
Tax-free dividend yield (based on net asset value per share at the start of the year)

Excluding special dividend

Including special dividend

4.7%

N/A

5.8%

11.5%

 

*Excluding proposed final dividend payable on 17 August 2022.

 

Enquiries:

James Sly / Graham Venables, Mercia Asset Management PLC – 0330 223 1430

Website: www.mercia.co.uk/vcts

 

 

 

CHAIRMAN’S STATEMENT

 

Results and dividend

The net asset value (NAV) per share at 31 March 2022, after deducting dividends totalling 9.0 pence paid during the year, was 97.9 pence compared with 107.0 pence as at 31 March 2021. The total return per share for the year as shown in the income statement was minus 0.1 pence (2021: 33.9 pence). It is pleasing to note the strength of the unquoted portfolio’s performance, with investment proceeds totalling £24.8 million on an initial cost of £11.0 million, producing a £13.8 million gain. There was a decrease in the directors’ valuation of the unquoted venture portfolio of £3.6 million, and a small increase in the valuation of the company’s listed holdings of £0.7 million. The volatility in the listed portfolio was primarily as a result of a reduction in the musicMagpie PLC share price and general market instability in the three months to March 2022. The company’s NAV total return over five years is comfortably ahead of the broad UK equity market total return index which we use as a comparator.

 

Three years ago we set an objective of paying an annual dividend representing a yield of at least 4% of the opening NAV per share in each year. This year we increased the target dividend yield to 4.5% of opening NAV per share in each year. Having already declared an interim dividend of 2.0 pence per share which was paid in January 2022, your directors now propose an increased final dividend of 3.0 pence. These payments totalling 5.0 pence are equivalent to 4.7% of the opening NAV of 107.0 pence per share. The proposed final dividend will, subject to approval by shareholders at the annual general meeting, be paid on 17 August 2022.

 

Our dividend investment scheme, under which dividends can be re-invested in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate. Instructions on how to join the scheme are included within the dividend section of our website, which can be found here: mercia.co.uk/vcts/n3vct/.

 

Investment portfolio

While COVID-19 continues to provide challenges to some of our portfolio companies, the changes it has produced in consumer habits and working practices have provided opportunities for others. The rate of inflation is the greatest concern. In early 2022 quoted markets reacted to the news on inflation and the invasion of Ukraine by falling from previous highs. Despite this our non-venture listed equity portfolio ended the year 2.3% ahead of March 2021. In response to the invasion of Ukraine, our investment manager undertook a review of the portfolio for links to sanctioned individuals and companies, and continues to monitor the situation carefully.

 

After the challenges faced due to COVID-19 in the year to March 2021, venture investment levels have recovered during the year and exceeded pre-pandemic levels, with £9.7 million of capital provided to nine new venture capital investments and £5.0 million of follow on capital invested into the existing portfolio. We also made good progress in realising the company’s mature portfolio acquired under previous VCT rules with the remaining investments representing 37% by value of the total venture capital portfolio.

 

It was a busy year for sales, with a number of notable transactions either completed or in progress as at the balance sheet date. The highlights during the year were the partial disposal of Oddbox, generating a return of 10.9 times original cost, and the sale of Currentbody.com and Intelling Group which registered a lifetime return of 2.9 times and 3.6 times respectively. The part disposal of musicMagpie plc generated a return of 11.6 times the original cost of the investment based on the share price upon admittance to the AIM market, although the value of the retained portion fell in early 2022 reducing the cumulative lifetime return on cost at the reporting date to 7.2 times. In June 2022 we also disposed of our holding in another newer early stage portfolio, Knowledgemotion, for £3.0 million, representing a 1.7 times return on the original cost. As this disposal was in process as at 31 March 2022 this asset was valued in line with the sale proceeds received.

 

Share offers and liquidity

Liquidity was reduced marginally during the period as a result of £9.8 million of dividends paid, following strong venture portfolio realisations in the current and prior year. The VCT scheme rules allow a grace period of only 12 months before the proceeds are included within the 80% qualifying assets test for core assets.

 

As a result of the public share offer launched in January 2022, 16,700,963 new ordinary shares were issued just after the end of the financial year in April 2022 for gross proceeds of £17.0 million.

 

Following the increase in the rate of investment in the past year, we continue to monitor liquidity and in coming months will assess the requirement to fundraise in the 2022/23 tax year.

 

Share buy-backs

We have maintained our policy of buying back our shares in the market, where necessary to maintain market liquidity, at a discount of 5% to NAV. During the year 1,990,757 shares, equivalent to approximately 1.8% of the opening share capital, were purchased for cancellation.

 

VCT legislation and qualifying status

The company has continued to meet the stringent and complex qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Mercia monitors the position closely and reports regularly to the board.

 

The upcoming 2025 ‘sunset clause’ was a European state aid requirement when the VCT scheme received state aid approval, which means that without a small change in legislation investors will not receive upfront tax relief when investing in VCTs after this date. We therefore expect that there will be a review of all current tax advantaged schemes by the government in the run up to 2025. The board considers that the company, and VCTs more generally, are successfully delivering against the government’s mandate, which is to channel money into higher-risk, early-stage businesses. Mercia is represented on the relevant committees of the VCTA, BVCA and AIC working to demonstrate to government the positive contributions of VCTs. No further amendments to the VCT legislation were announced by the Chancellor in his 2022 Spring Budget statement.

 

Annual general meeting

The company’s annual general meeting (AGM) will take place on 9 August 2022. The AGM usually provides an excellent opportunity for shareholders, directors and the manager to meet in person and exchange views and comment, but in 2020 and 2021 we held the meetings remotely in view of Government advice concerning non-essential travel and social distancing. Subject to any subsequent restrictions being enforced, we intend to hold the 2022 AGM in person at NVM LLP, Time Central, 32 Gallowgate, Newcastle, NE1 4SN. Following positive feedback received from the last two years, we also intend to offer remote access for shareholders through an online webinar facility for those who would prefer not to travel. Full details and formal notice of the AGM will be provided separately.

 

Independent auditor

The audit committee regularly reviews the requirements and deadlines for mandatory audit tendering and rotation. The most recent tender took place in November 2020, as a result of which Mazars LLP were appointed as the independent auditor of the company. The year ended 31 March 2022 was the company’s second audit performed by Mazars. A resolution for their re-appointment will be proposed at the forthcoming AGM.

 

Outlook

Despite the difficulties caused by domestic inflation and the residual impact of COVID-19 measures, we are encouraged by the progress made within the portfolio as a whole. We remain committed to supporting the development of entrepreneurial early stage businesses in the UK and believe that your company remains well placed to do so.

 

 

 

 

 

 

 

James Ferguson

Chairman

15 June 2022

 

 

 

 

Extracts from the audited financial statements for the year ended 31 March 2022 are set out below.

 

INCOME STATEMENT

for the year ended 31 March 2022

 

  Year ended 31 March 2022 Year ended 31 March 2021
  Revenue 

£000 

Capital 

£000 

Total 

£000 

Revenue 

£000 

Capital 

£000 

Total 

£000 

Gain/(loss) on disposal of investments –  3,963  3,963  –  8,646  8,646 
Movements in fair value of investments –  (2,860)  (2,860)  –  31,139  31,139 
  ———-  ———-  ———-  ———-  ———-  ———- 
  –  1,103  1,103  –  39,785  39,785 
Income 1,438  –  1,438  1,500  –  1,500 
Investment management fee (563) (1,690) (2,253) (462) (3,019) (3,481)
Other expenses (407) –  (407) (404) –  (404)
  ———-  ———-  ———-  ———-  ———-  ———- 
Return before tax 468  (587)  (119) 634  36,766  37,400 
Tax on return (1) –  (72) 72  – 
  ———-  ———-  ———-  ———-  ———-  ———- 
Return after tax 467  (586)  (119) 562  36,838  37,400 
  ———-  ———-  ———-  ———-  ———-  ———- 
Return per share 0.4p (0.5)p (0.1)p 0.5p 33.4p 33.9p

 

The dividends paid or proposed in respect of the year are 5.0p (2021: 9.0p)

 

BALANCE SHEET

as at 31 March 2022

  31 March 2022 

£000 

31 March 2021 

£000 

Fixed assets:    
  Investments 85,269  94,301 
  ———-  ———- 
Current assets:    
  Debtors 60  1,630 
  Cash and cash equivalents 21,683  23,397 
  ———-  ———- 
  21,743  25,027 
Creditors (amounts falling due within one year) (152) (1,785)
  ———-  ———- 
Net current assets 21,591  23,242 
  ———-  ———- 
     
Net assets 106,860  117,543 
  ———-  ———- 
     
Capital and reserves:    
Called-up equity share capital 5,456  5,492 
Share premium 20,909  19,716 
Capital redemption reserve 602  502 
Capital reserve 64,849  64,263 
Revaluation reserve 13,659   26,105  
Revenue reserve 1,385  1,465 
  ———-  ———- 
Total equity shareholders’ funds 106,860  117,543 
  ———-  ———- 
Net asset value per share 97.9p 107.0p

 

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2022

 

  —————Non-distributable reserves————— Distributable reserves Total 
  Called up share 

capital 

Share 

premium

Capital 

redemption 

reserve 

Revaluation 

reserve* 

Capital 

reserve 

Revenue 

reserve 

 
  £000  £000  £000  £000  £000  £000  £000 
At 1 April 2020 5,492  19,716  502  26,105  64,263  1,465  117,543 
Return after tax –  –  –  (12,446)  11,860 467 (119)
Dividends paid –  –  –  –  (9,302) (547) (9,849)
Net proceeds of share issues 64  1,193 –  –  –  –  1,257 
Shares purchased for cancellation

(100)

– 

100 

– 

(1,972)

– 

(1,972)

  ———-  ———-  ———-  ———-  ———-  ———-  ———- 
At 31 March 2021 5,456  20,909  602 13,659 64,849 1,385 106,860
  ———-  ———-  ———-  ———-  ———-  ———-  ———- 

 

 

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2021

 

  —————Non-distributable reserves————— Distributable reserves Total 
  Called up share 

capital 

Share 

premium 

Capital 

redemption 

reserve 

Revaluation 

reserve* 

Capital 

reserve 

Revenue 

reserve 

 
  £000  £000  £000  £000  £000  £000  £000 
At 1 April 2020 4,647  7,428  432  (1,653)  60,786  903  72,543 
Return after tax –  –  –  27,758  9,080  562  37,400 
Dividends paid –  –  –  –  (4,411) (4,411)
Net proceeds of share issues 915  12,288  –  –  –  –  13,203 
Shares purchased for cancellation

(70)

– 

70 

– 

(1,192)

– 

(1,192)

  ———-  ———-  ———-  ———-  ———-  ———-  ———- 
At 31 March 2021 5,492  19,716  502  26,105  64,263  1,465  117,543 
  ———-  ———-  ———-  ———-  ———-  ———-  ———- 

 

*The revaluation reserve is generally non-distributable other than that part of the reserve relating to gains/losses on readily realisable quoted investments, which is distributable.

STATEMENT OF CASH FLOWS

for the year ended 31 March 2022

 

  Year ended  Year ended 
  31 March 2022  31 March 2021 
  £000  £000 
Cash flows from operating activities:    
Return before tax (119)  37,400 
Adjustments for:    
(Gain)/loss on disposal of investments (3,963) (8,646)
Movement in fair value of investments 2,860 (31,139)
(Increase)/decrease in debtors 1,570 (482)
Increase/(decrease) in creditors (1,633)  1,648 
  ———-  ———- 
Net cash outflow from operating activities (1,285)  (1,219) 
  ———-  ———- 
Cash flows from investing activities:    
Purchase of investments (15,360) (10,033)
Sale/repayment of investments 25,495  18,173 
  ———-  ———- 
Net cash inflow/(outflow) from investing activities 10,135 8,140
  ———-  ———- 
Cash flows from financing activities:    
Issue of ordinary shares 1,298 13,578 
Share issue expenses (41) (375)
Share subscriptions held pending allotment –   
Purchase of ordinary shares for cancellation (1,972) (1,192)
Equity dividends paid (9,849) (4,411)
  ———-  ———- 
Net cash inflow/(outflow) from financing activities (10,564) 7,600
  ———-  ———- 
Increase/(decrease) in cash and cash equivalents (1,714) 14,521
Cash and cash equivalents at beginning of year 23,397 8,876
  ———-  ———- 
Cash and cash equivalents at end of year 21,683 23,397
  ———-  ———- 

 

 

INVESTMENT PORTFOLIO SUMMARY

as at 31 March 2022

 

 

Cost

£000

Valuation

£000

% of

net assets

by value

Fifteen largest venture capital investments:      
Lineup Systems 974 7,218 6.8
Evotix (formerly SHE) 2,487 5,328 5.0
Volumatic Holdings 216 3,338 3.1
Grip-UK (ta. Climbing Hangar) 3,174 3,174 3.0
Oddbox 350 3,052 2.9
Knowledgemotion 1,740 2,975 2.8
IDOX* 530 2,763 2.6
Buoyant Upholstery 907 2,313 2.2
Ideagen* 352 2,079 1.9
Newcells Biotech 1,592 1,904 1.8
musicMagpie* 201 1,876 1.8
Clarilis 1,772 1,853 1.7
Intechnica 1,665 1,833 1.7
Rockar 1,591 1,767 1.7
Tutora (ta. Tutorful) 1,813 1,737 1.6
       
  ———- ———- ——–
Fifteen largest venture capital investments 19,364 43,210 40.6
Other venture capital investments 42,051 29,638 27.6
  ———- ———- ——–
Total venture capital investments 61,415 72,848 68.2
Listed equity investments 10,195 12,421 11.6
  ———- ———- ——–
Total fixed asset investments 71,610 85,269 79.8
  ———-    
Net current assets   21,591 20.2
    ———- ——–
Net assets   106,860 100.0
    ———- ——–

*Quoted on AIM

 

 

RISK MANAGEMENT

 

The board carries out a regular and robust assessment of the risk environment in which the company operates and seeks to identify new risks as they emerge. The principal and emerging risks and uncertainties identified by the board which might affect the company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows:

 

Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals. The securities of smaller companies in which the company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities. The company may invest in businesses whose shares are quoted on AIM – the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide. Mitigation: the directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector, within the rules of the VCT scheme. The board reviews the investment portfolio with the manager on a regular basis.

 

Financial risk: most of the company’s investments involve a medium to long-term commitment and many are relatively illiquid. Mitigation: the directors consider that it is inappropriate to finance the company’s activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the company’s assets in cash or cash equivalents in order to be in a position to pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies. The company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.

 

UK’s ongoing relationship with the European Union risk: following the UK’s withdrawal from the European Union in January 2020, the ongoing relationship is evolving which may impact on the trading activities of some investee companies. Mitigation: whilst we do not expect any significant impact on the operations of Northern 3 VCT itself, the board and the manager follow developments closely with a view to identifying changes which might affect the company’s investment portfolio. The manager works closely with investee companies in order to plan for a range of possible outcomes.

 

Economic risk: events such as economic recession or general fluctuation in stock markets, exchange rates and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company’s own share price and discount to net asset value. The level of economic risk has been elevated by the lingering impact of measures to counter the COVID 19 pandemic, inflationary pressures, and conflict in Ukraine. Mitigation: the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where it is appropriate and in the interests of the company to do so. The manager typically provides an investment executive to actively support the board of each unquoted investee company. At all times, and particularly during periods of heightened economic uncertainty, the investment executives share best practice from across the portfolio with investee management teams in order to mitigate economic risk.

 

Stock market risk: some of the company’s investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as the conflict in Ukraine, terrorist activity or global health crises, such as the COVID-19 pandemic, can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the company’s quoted investments are actively managed by specialist managers, including Mercia in the case of the AIM-quoted investments, and the board keeps the portfolio and the actions taken under ongoing review.

 

Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment. Mitigation: the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

 

Legislative and regulatory risk: in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK. Changes to the UK legislation in the future could have an adverse effect on the company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval. Mitigation: the board and the manager monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.

 

Internal control risk: the company’s assets could be at risk in the absence of an appropriate internal control regime which is able to operate effectively even during times of disruption, such as that caused by COVID-19. Mitigation: the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager. These include controls designed to ensure that the company’s assets are safeguarded and that proper accounting records are maintained.

 

VCT qualifying status risk: while it is the intention of the directors that the company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained. A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment. Mitigation: the investment manager keeps the company’s VCT qualifying status under continual review and its reports are reviewed by the board on a quarterly basis. The board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.

 

 

DIRECTORS’ RESPONSIBILITIES STATEMENT

 

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

 

Under company law the directors must not approve the financial statements unless they

are satisfied that they give a true and fair view of the state of affairs of the company and of

its profit or loss for the year.

 

In preparing the financial statements, the directors are required to (i) select suitable accounting policies and then apply them consistently; (ii) make judgements and estimates that are reasonable and prudent; (iii) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; (iv) assess the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and (v) prepare the financial statements on the going concern basis unless they either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that comply with that law and those regulations.

 

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The directors have confirmed that to the best of their knowledge (i) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and (ii) the directors’ report and strategic report include a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that they face.

 

The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy.

 

The directors of the company at the date of this announcement were Mr J G D Ferguson (Chairman), Mrs A B Brown, Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

 

 

 

OTHER MATTERS

 

The financial information set out above does not constitute the company’s statutory accounts for the years ended 31 March 2022 or 2021 but is derived from those accounts. Statutory accounts for 2021 have been delivered to the registrar of companies, and those for 2022 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

The calculation of the return per share is based on the loss after tax for the year of £119,000 (2021: profit of £37,400,000) and on 109,817,073 (2021: 110,299,514) shares, being the weighted average number of shares in issue during the year.

 

The calculation of the net asset value per share as at 31 March 2022 is based on net assets of £106,860,000 (2021: £117,543,000) divided by the 109,115,361 (2021: 109,840,118) ordinary shares in issue at that date.

 

If approved by shareholders, the proposed final dividend of 3.0 pence per share for the year ended 31 March 2022 will be paid on 17 August 2022 to shareholders on the register at the close of business on 22 July 2022.

 

The full annual report including financial statements for the year ended 31 March 2022 is expected to be made available to shareholders on or around 8 July 2022 and will be available to the public at the registered office of the company at Forward House, 17 High Street, Henley-in-Arden B95 5AA and on the company’s website.

 

Neither the contents of the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the Mercia Asset Management PLC website (or any other website), are incorporated into, or form part of, this announcement.

 


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