Hygea VCT plc : Annual Financial Report
Hygea VCT plc
Annual Report and Accounts for the year ended 31 December 2014
and
Notice of Annual General Meeting
The Directors are pleased to announce the audited results of the Company for the year ended 31 December 2014 and a copy of the Annual Report and Accounts is expected to be sent to Shareholders shortly. Set out below are extracts of the audited Report and Accounts.
In addition, the Notice of Annual General Meeting ("AGM") is attached at the end of the Report and Accounts and is set out below. The AGM will be held at the offices of Octopus Investments, 33 Holborn, London EC1N 2HT on Thursday 14 May 2015 at 12.00 noon.
A copy of both documents is available from the registered office of the Company at 39 Alma Road, St Albans AL1 3AT.
Financial Summary
| Year to 31 December 2014 | Year to 31 December 2013 | |
| Net assets (£'000s) | 7,334 | 7,829 |
| Return on ordinary activities after tax (£'000s) | (495) | (1,522) |
| Earnings per share | (6.1p) | (18.7p) |
| Net asset value per share | 90.4p | 96.5p |
| Dividends paid since inception | 24.25p | 24.25p |
| Total return (NAV plus dividends paid) | 114.65p | 120.75p |
Enquiries:
Charles Breese, Hygea VCT plc on 01280 703482 or larpentnewton@btinternet.com
Roland Cornish, Beaumont Cornish Limited on 020 7628 3396
Chairman's Statement
I am pleased to present the 2014 annual report to shareholders in Hygea vct plc.
Overview
There has been no change in the constituents of the portfolio, apart from the previously reported restructuring of Fuel3D (formerly Eykona), meaning that Hygea remains effectively fully invested. Explained below are the actions which your board is taking in order to i) accelerate the achieving of liquidity events by portfolio companies, thus enabling dividends to be paid, and ii) assemble a pool of investors interested in buying shares from Hygea shareholders who would like to exit.
Hygea must address four key issues, namely:
- the emergence of deflation within continental Europe and historically low inflation in the UK.
- the need to be able to support portfolio companies considered capable of achieving liquidity events, such as listing on AIM or a trade sale.
- the need to create a pool of investors interested in acquiring the shares of those Hygea shareholders wishing to exit.
- this year's AGM is one at which we are required to put to shareholders a resolution regarding the continuation of the company.
I deal with each of above in turn as follows:
- Deflation/low inflation
Deflation is beginning to manifest itself in continental Europe and in the UK. This creates an investing background which few investors have experience of dealing with. Your board believes that the investing antidote is to invest in businesses with pricing power - these are precisely the companies which Hygea's investment template was developed to identify (and which we term SmartCos).
- Portfolio Companies Planning to List on AIM
As mentioned later in this statement, several portfolio companies are planning to list on AIM in 2015 and 2016. As mentioned in previous statements, one of your board's key objectives has been and continues to be to get as much of the portfolio AIM listed as possible - this provides the opportunity to achieve partial realisations and pay dividends, against a background where the timing of trade sales is difficult to predict, as buyers appear to be becoming increasingly risk averse and/or cautious.
Whilst the investment market in the UK for digital technologies is 'hot', the market for so-called DeepTech companies (being companies, including MedTech, where competition takes longer to emerge) is difficult because of the longer timescales involved. As a result, Charles Breese is working through his company, Larpent Newton & Co Ltd, to develop a collaboration with a broker which recognises both:
- the attractive investment opportunities offered by SmartCos, which are within two years of targeting to achieve an IPO (vs. the City's current definition of pre-IPO as being within six months of IPO), or are at a later stage of development and ;
- the need to assemble investors with patient mindsets to invest in such companies.
The implementation of the project is facilitated by the new software being developed for crowdfunding platforms and which certain owners will 'white label' to third parties as part of their commercialisation strategies. Putting in place this collaboration is expected to bring the following benefits to Hygea:
- a more efficient fundraising process for portfolio companies.
- greater control over creating the appropriate shareholder composition within AIM listed portfolio companies between patient private investors and institutional investors.
- a reduced possibility of Hygea's investees becoming 'orphaned' smallcaps due to a change in institutional investor sentiment.
c) Hygea shareholders wishing to exit
An additional benefit sought from putting in place the broking collaboration referred to above is to create a pool of investors interested in purchasing the shares of Hygea shareholders who wish to sell.
d) Continuation Resolution
The board's proposals as to how Hygea should operate during the next three years are set out after the Portfolio Review section.
Results and Dividend
During the year our revenue return on ordinary activities saw a loss of 1.9p per share compared to a loss of 2.0p in 2013. I am pleased to report that our total expense ratio has remained stable at 2.21%, compared to 2.23% in 2013, despite the reduction in net asset value. This ratio remains lower than most other VCTs due to the self-management structure of Hygea.
The capital return per share amounted to a loss of 4.2p compared to a loss of 16.7p in 2013. During the year we took advantage of the strength of Omega Diagnostic's share price and, as previously reported, sold 195,000 shares at an average price of 31.5p. We have also sold 87,000 shares from our shareholding in Tristel. These transactions have realised £133,000 to provide working capital allowing us to end the year with a positive cash balance.
Hygea has a policy of accruing for the Board's incentive fee arrangements in the accounts. This fee will only be paid out when shareholders have received, cumulatively, 80p per share in distributions, and, reflecting the decrease in NAV, this accrual has been reduced from £ 825,000 to £702,000 in this year's accounts.
Overall the total return for the year amounted to a loss of 6.1p per share, compared to a loss of 18.7p per share in 2013. As Scancell makes up over 50% of the portfolio value, the loss of £265,000 in its share value makes up over half of the total capital loss before the reduction in performance fee.
Hygea maintains its policy of targeting to pay a dividend of 5p per year albeit averaged out over a period of years.
Portfolio Review
Although there has been no change in the constituents of the portfolio, many of the companies have made good progress during the year as described in Investment Review - selected highlights are described below in respect of those companies from which we are anticipating a significant liquidity event by the end of 2016.
a) Hallmarq Veterinary Imaging
The veterinary MRI company, Hallmarq, is enjoying rapid, robust growth and cash generation based on a business model set up to maximise recurring revenues. Therefore Hygea decided to convert its convertible loan stock during the year as the prospects for Hallmarq are now excellent. Hallmarq's core equine business is exceeding all growth expectations and their new high field scanners are starting to be sold into the companion animal market, for use largely on cats and dogs, which is estimated to be five times larger than the equine market. The major shareholders in Hallmarq want the company to list on AIM, and to this end the process of recruiting an appropriate chairman to head up an AIM listing is under way.
b) Fuel3D
We made a modest follow-on investment of £ 50,000 in Fuel3D, which was originally named Eykona. Under new management, the company has piloted the use of its 3D camera technology from wound care into 3D printing. In 2013 they secured the initial finance and publicity through the crowd sourcing service Kickstarter in the USA, which was followed by raising some £6 million in 2014, predominantly from private investors and a trade investor. The net result for Hygea is that an original investment in Eykona of £200,000 and a paper loss at the start of 2014 of £161,000, has now been transformed into a holding valued at £396,000 including our follow-on investment of £50,000 in the new entity. Fuel3D's camera has a fast scanning time and excellent resolution making it far superior to other 3D cameras when used on faces and body parts. This enables the Fuel3D camera to be used for medical applications such as masks for burns victims and non-medical applications, such as security biometrics, customised shoes and fashion accessories.
c) OR Productivity (ORP)
The key events in 2014 were:
i) An international hospital group with over 220 hospitals worldwide has started to adopt ORP's robotic controller of the telescopes used by keyhole surgeons in the group's UK hospitals. Achieving major third party endorsement such as this is a key milestone when commercialising disruptive MedTech technology.
ii)A collaborative partner has been found in the USA, and the first hospital installation has been achieved.
d) AIM companies excluding Scancell
We are confident that as a group, these companies will deliver good returns, with each of them positioned to deliver game changing technologies. For example, EKF Diagnostics faced an erosion of its share price during the year, despite posting impressive sales and profit growth. This was due in part to market reaction to the news that the price of reimbursement codes in the US halved in respect of one of the assays of one of their 2014 acquisitions in DNA diagnostic kits. We believe that this was, in reality, not nearly as commercially significant as the market judged, because the company was acquired for its pipeline of assays due to be launched, not the assay for which reimbursement halved. However having invested early, the value of Hygea's investment remains 5% above its original cost and EKF is developing transformational technology whose value is not reflected in the share price.
e) Scancell
Hygea's holding in Scancell still dominates the portfolio accounting for almost 58% of the net asset value. Scancell's share price is still languishing below 30p per share, so down on the bid price of 47p at the end of 2012. Both Scancell's technologies continue to make impressive progress. The whole area of cancer immunology is now centre stage for major pharmaceutical companies, seeking to secure a long term position, as this very new exciting area starts to deliver excellent clinical outcomes, which are anticipated to replace current crude, but often effective, treatments based around chemotherapy and radiotherapy. Hygea has already recovered the cost of the whole of its original investment in Scancell through share sales. Hygea's current holding was worth £4,240,000 on 31 December 2014 from an associated investment of £802,000 so a paper gain of more than 5 times. The Chairman of Scancell has stated publicly that he expects to deliver a liquidity event during 2015. With other similar technologies changing hands for sums measured in hundreds of millions of pounds, not surprisingly your Board is monitoring the position very closely as such an exit would transform Hygea.
Future structure and focus for Hygea
As will be understood from the Overview and the Portfolio Review, your board believes that i) the portfolio has the potential to achieve some significant liquidity events and ii) it needs to strengthen Hygea's ability to influence portfolio company liquidity events both as to quantum and time, as outlined in Overview. Set out below is how we propose that Hygea should be operated both to maximise the likelihood of a sizeable liquidity event and also in terms of what would happen upon the occurrence of a sizeable liquidity event:
a) your board will proactively pursue implementing the broking arrangements outlined in Overview in order to provide portfolio companies with greater ability to achieve liquidity events sooner, and also provide potential buyers for existing shareholders wishing to exit.
b) we envisage bringing the broking service once established to the attention of shareholders so that those of you who wish to use Hygea as a source of pre-IPO (as defined in Overview) and AIM listed co-investment opportunities can do so.
c) a sizable proportion of any proceeds arising from any portfolio company liquidity event will be distributed to shareholders, with only a modest proportion retained for ongoing investment, including supporting, where merited, existing portfolio companies.
d) in the event of any new investments, these will only be in pre-IPO (as defined in Overview) and AIM listed SmartCos. Therefore we would not propose investing directly in start-up or early stage technology businesses, since we believe that commercialisation is more efficiently performed by established businesses. This is well illustrated by the way in which EKF Diagnostics and Omega Diagnostics have bought and developed early stage businesses themselves.
Therefore we encourage shareholders to vote in favour of the resolution regarding the continuation of the company, since we are confident that over the next three years there is significant value to be unlocked from the portfolio.
Annual General Meeting
The Company's Annual General Meeting will be held at 12.00 on Thursday 14 May 2015 at the new offices of Octopus Investments, 33 Holborn, London EC1N 2HT and we look forward to welcoming you at the meeting.
VCT Qualifying Status
PricewaterhouseCoopers LLP continues to provide the Board with advice on the on-going compliance with the increasingly complex HMRC rules and regulations concerning VCTs. The Board has been advised that the Company continues to comply with the conditions laid down by HMRC for maintaining approval as a VCT.
Future prospects
Many aspects of healthcare are gaining an ever-increasing profile in the UK and the world. These include the exciting potential of new fields such as cancer immunology, genomics, Big Data, convergent and stratified medicine. Also there are significant new threats to the status quo such as emerging diseases (e.g. Ebola), as well as resistance to antibiotics. In addition, personal lifestyle issues leading to obesity and an ageing population mean a startling increase in chronic diseases, causing the demand for health services to outstrip traditional methods of delivery and financial support. The introduction of new technology is essential to close this gap.
Hygea's focus on disruptive technologies that deliver better clinical outcomes at lower cost, means that your Board is confident for the fund's future.
James Otter
Chairman
30 March 2015
Investment Review
Investment Portfolio
| Unquoted Investments | Investment at cost (£'000) | Unrealised profit/(loss) (£'000) | Carrying value at 31 December 2014 (£'000) | Movement in the year to 31 December 2014 (£'000) |
| Hallmarq Veterinary Imaging Limited | 1,116 | (62) | 1,054 | (21) |
| OR Productivity plc | 765 | (101) | 664 | - |
| Fuel 3D Limited (formerly Eykona Technologies Limited) | 250 | 146 | 396 | 307 |
| Glide Pharmaceutical Technologies Limited | 326 | (8) | 318 | - |
| Arecor Limited | 127 | 5 | 132 | - |
| ImmunoBiology Limited | 868 | (742) | 126 | - |
| Exosect Limited | 250 | (125) | 125 | (125) |
| Insense Limited | 509 | (421) | 88 | - |
| Archimed LLP | 132 | (65) | 67 | (4) |
| Wound Solutions Limited | 350 | (350) | - | - |
| Axon Limited | 374 | (374) | - | (282) |
| Total unquoted investments | 5,067 | (2,097) | 2,970 | (125) |
| Quoted Investments | ||||
| Scancell plc | 802 | 3,438 | 4,240 | (265) |
| Omega Diagnostics plc | 347 | 99 | 446 | 21 |
| EKF Diagnostics plc | 260 | 14 | 274 | (154) |
| EpiStem Holdings plc | 44 | 50 | 94 | (19) |
| Reneuron plc | 50 | (12) | 38 | 10 |
| Tristel plc | 7 | 3 | 10 | 5 |
| Total quoted investments | 1,510 | 3,592 | 5,102 | (402) |
| Total investments | 6,577 | 1,495 | 8,072 | (527) |
Objective and Investment Policy
The Company's objective is to provide shareholders with an attractive income and capital return by investing its funds in a portfolio of unquoted and quoted UK MedTech companies which meet the relevant criteria under the VCT Rules and conform to the investment template referred to in the second paragraph.
The Company's investment policy is designed to deliver absolute returns on its investments rather than a performance measured against the market indices. On an ongoing basis, it is intended that at least 80% of the Company's assets will be invested in qualifying holdings, with the remainder held in cash and money market securities. The Board does not intend to vary the Company's investment policy. However, should a material change be deemed appropriate this will be done with shareholders' approval by the passing of an ordinary resolution and in accordance with the Listing Rules.
The Directors control the overall risk of the portfolio by ensuring that the Company has exposure to a diversified range of quoted and unquoted companies from the MedTech sector. The Directors will continually monitor the investment process and ensure compliance with the investment policy.
Valuation Methodology
Quoted and unquoted investments are valued in accordance with the accounting policy included in the Report and Accounts, which takes account of current industry guidelines for the valuation of venture capital portfolios and is compliant with International Private Equity and Venture Capital Valuations guidelines and current financial reporting standards.
If you would like to find out more regarding the International Private Equity and Venture Capital (IPEVC) Valuation Guidelines, please visit their website at: www.privateequityvaluation.com.
Ten largest holdings (by value)
Scancell plc
Background: Scancell is an AIM listed, Nottingham-based biotechnology company that is developing a pipeline of therapeutic vaccines to target various types of cancer, with the first target being melanoma. The platform technology, in effect, educates the immune system how to respond - this means that the technology can also be licensed to pharmaceutical companies to assist the development of their own therapeutic vaccines, which is an area of emerging importance for which a number of big pharmas do not have in-house technology. In August 2012 a new platform technology, Moditope, was announced to join the existing Immunobody platform.
Update since 2013: see comments in Chairman's Statement. The company has continued to make progress, namely:
a) at the October 2014 AGM it was announced that:
- SCIB1 may have an important role to play as first line treatment (adjuvant) in melanoma patients who no longer have measurable disease (following surgery) and are often generally quite well, but are at a high risk of recurrence and with very few, if any, effective treatment options (there are c. 360,000 such patients in the US alone, of whom c.45% are suitable for SCIB1 treatment).
- the ImmunoBody platform is showing the potential to be taken into infectious diseases, and early discussions are being held with potential co-development partners.
- both platforms are currently being evaluated by a number of pharmaceutical companies under a CDA.
b) The January 2015 update re the SCIB1 trial reported that all 16 patients with fully resected disease are still alive with a median survival of 26 months after starting treatment and only four have shown disease progression - the median survival time is 30 months for Stage III patients (n=9) and 27 months for Stage IV patients (n=7) - this compares very favourably with reported data from a peptide vaccine trial following two years of treatment, in which 50% of Stage III patients had disease progression and 19% had died; while 52% of Stage IV patients had disease progression and 33% had died.
| Initial investment date: | December 2003 |
| Cost: | £802,000 |
| Valuation: | £4,240,000 |
| Equity held: | 5.9% |
| Last audited accounts: | 30 April 2014 |
| Turnover: | £nil |
| Loss before tax: | £2.5 million |
| Net assets: | £9.1 million |
Hallmarq Veterinary Imaging Limited
Background: Hallmarq specialises in developing low cost magnetic resonance imaging systems for the vet market. The first application was for equine vets to enable the diagnosis of causes of lameness in horses that are not identifiable by any other method - this was the first MRI scanner in the world for standing horses - the business model relies principally on a share of scan fees (i.e recurring income) rather than systems sales. The next development project is an MRI scanner for companion animals, PetVet, a market which is significantly larger than the equine market - the first PetVet was installed in Q4 2013.
Update since 2013: see comments in Chairman's Statement. The audited accounts to August 2014 showed sales of £4.3 million (2013: £3.8 million), EBITDA of £1.86 million (2013: £1.29 million) and pre-tax profit of £765,000 (2013: £604,000), with recurring income growing from £2.9 million to £3.6 million.
| Initial investment date: | August 2005 |
| Cost: | £1,116,000 |
| Valuation: | £1,054,000 |
| Equity held: | 10.2% |
| Last audited accounts: | 31 August 2014 |
| Turnover: | £4.3 million |
| Profit before tax: | £765,000 |
| Net assets: | £5.8 million |
OR Productivity plc
Background: At the end of 2011, Freehand 2010 (a Hygea investee) was acquired by OR Productivity plc (ORP) in exchange for ORP shares. ORP has established the nucleus of a very strong team (led by the former R&D director of Smiths Medical) for commercialising productivity enhancing technologies within the Minimally Invasive Medicine sector - the team is aware of a number of companies within this sector which have good technologies but lack the skills to commercialise their technology efficiently - Freehand 2010 is ORP's first acquisition. Freehand 2010 owns the intellectual property to technology incorporated in a product for robotically controlling the laparoscope (part of the camera system) used by keyhole surgeons - the camera system is used to put an image of the inside of the patient's body onto a screen, and the surgeon uses this screen when operating to view the procedure. Keyhole surgery is growing in relation to open surgery because the smaller incisions required by the former result in reduced pain and reduced recovery time (hospital stays are very expensive). The business model is free placement of the system and sales of a consumable per operation to generate recurring income - in 2008 there were estimated to be c.3.8 million keyhole operations in Europe and the US (Medtech Insight 2010), a sector predicted to grow at 9% pa (Medtech Insight 2007). A key market development is the emergence of HD and 3D for use by keyhole surgeons to provide improved depth of vision. However, viewers of HD and 3D images generally become nauseous if the picture is not steady - the Freehand product appears to be being regarded as the leading solution worldwide for enabling HD and 3D camera systems for keyhole surgery to provide a rock steady image.
Update since 2013: see comments in Chairman's Statement. The company has established a process for achieving a predictable level of system installations per month in the UK and from January 2015 the focus was also directed to increasing consumable utilisation per system - early indications are positive, and the expectations are for very significant growth in sales in 2015/16 - for the year ended March 2014, sales were £277,000 (2013: £108,000).
| Initial investment date: | March 2011 |
| Cost: | £765,000 |
| Valuation: | £664,000 |
| Equity held: | 13.8% |
| Last audited accounts: | 31 March 2014 |
| Turnover: | £277,000 |
| Loss before tax: | £1.6 million |
| Net assets: | £227,000 |
Omega Diagnostics plc
Background: Omega listed on AIM via a reverse acquisition in 2006. It is a healthcare diagnostics business
providing IVD products for use in hospitals, blood banks, clinics and laboratories in over 100 countries - it
specialises in the areas of Food Intolerance, Allergy and Autoimmune Disease, and Infectious Disease. One of its products is Food Detective for home testing of allergies brought about by 59 commonly eaten foods. In December 2010 Allergopharma was acquired for £7.75 million - it produces manual assays for testing for allergies - part of the strategy for developing the Allergopharma business is to leverage off Omega's distribution reach, and take the assays into the much larger automated market using Omega's Genarrayt platform and the IDS-iSYS platform, which has been licensed from AIM listed Immunodiagnostic Systems Holdings.
In June 2012, Omega entered into agreements providing it with worldwide exclusive access to two point-of-care tests, one for CD4 and the other for Syphilis - testing for CD4 T- cells is a vital component for the management and care of people suffering from HIV, which affects c.33 million people worldwide - the key competition is currently flow cytometry, which involves laboratories and centralised testing.
In summary, the group currently has two key projects, each of which has transformational growth potential to augment the growth potential of the existing established businesses.
Update since 2013: both of the transformational projects are progressing and at least one of them (and possibly both) is expected to start generating sales in 2015/16. The interim results to September 2014 showed sales of £5.7 million (2013: £5.6 million) and adjusted pre-tax profit of £405,000 (2013: £375,000).
| Initial investment date: | August 2007 |
| Cost: | £347,000 |
| Valuation: | £446,000 |
| Equity held: | 2.4% |
| Last audited accounts: | 31 March 2014 |
| Turnover: | £11.6 million |
| Profit before tax: | £543,000 |
| Net assets: | £18.5 million |
Fuel 3D Limited (formerly Eykona Limited)
Background: Eykona was founded in 2007 to deploy computer vision technology (essentially 3D imaging) developed within Oxford University for developing a hand held camera to measure the volume of chronic wounds - this is a vital measurement for obtaining an understanding of whether a wound is getting better or worse, and hence assist determining the treatment to be applied. It was recognised from the outset that Eykona's 3D imaging technology has potential applications outside MedTech.
In 2013, it was learned that certain clinicians in the US were using the camera for making masks for assisting the recovery of patients with facial burns. As a result of this, Eykona became aware of the opportunity within the 3D printing market to develop its camera as the world's first high resolution 3D scanner for the consumer market. The opportunity was validated by launching the prototype on the crowd funding site, Kickstarter, with a 30-day sales target of 75 scanners being set to validate the $1,000 price point - this target was achieved within two days and the campaign closed at 430% of the initial target. In 2014, a new company, Fuel3D Limited, raised £1.6 million (with Hygea subscribing £50,000) and acquired Eykona's IP in exchange for Eykona shareholders acquiring Preferred Shares in Fuel 3D.
Update since 2013: see comments in Chairman's Statement.
| Initial investment date: | March 2010 |
| Cost: | £250,000 |
| Valuation: | £396,000 |
| Equity held: | <1% |
| Last audited accounts: | n/a* |
| Turnover: | £n/a |
| Loss before tax: | £n/a |
| Net assets: | £n/a |
*due to restructuring.
Glide Pharmaceutical Technologies Limited
Background: Glide has developed a needle-free drug delivery technology to deliver a drug formulation in a solid form directly through the skin of a patient. The Glide technology has been shown to have a number of benefits when compared to other delivery mechanisms - for example, it is particularly suited for vaccines, enabling them to be delivered in solid rather than liquid form, with the objective of delivering both better patient outcomes and also reduced supply chain costs.
Update since 2013: the company has completed studies confirming i) the ability of Glide to consistently deliver a solid dose formulation and ii) the utility and ease of the system's design and operation in naive human volunteers. Based on these results, the company is proceeding towards human bioequivalence testing with its octreotide product later in 2015.
As part of a diversification strategy for reducing risk, Glide has taken an exclusive worldwide licence to an innovative prostate cancer diagnostic technology from FScan Ltd, a Durham University spin-out company.
| Initial investment date: | November 2005 |
| Cost: | £326,000 |
| Valuation: | £318,000 |
| Equity held: | 1.2% |
| Last audited accounts: | 31 December 2013 |
| Turnover: | £187,000 |
| Loss before tax: | £2.3 million |
| Net assets: | £11.2 million |
EKF Diagnostics Holdings plc
Background: EKF is an AIM listed company which David Evans (formerly chairman of, inter alia, DxS) and Julian
Baines took board control of in Q4 2009, with the objective of building a leading diagnostic business with a
particular focus on the needs of diabetic patients - Messrs Evans and Baines had been chairman and CEO
respectively of AIM listed point of care diagnostics business BBI, which listed on AIM in 2004 and was acquired by Alere (formerly Inverness Medical) for £84 million in late 2007. EKF completed its first acquisition in July 2010, which has been followed by two smaller acquisitions - one of the latter was Quotient Diagnostics, in which Hygea invested in January 2010 and exchanged its investment for EKF shares in October 2010. In 2011, US based Stanbio was acquired for $19.5 million. In March 2013, 360 Genomics was acquired for an initial consideration of £1.6 million paid in EKF shares - it develops companion diagnostics to assist cancer treatment - the technology is able to detect 1 mutant gene in 100,000 normal gene copies versus the nearest technology that detects 1 in 100.
Update since 2013: in Q1 2014, EKF made three acquisitions to assist its move into molecular diagnostics/personalised medicine and build from the technology platform provided by 360 Genomics referred to above. The preliminary results to December 2014 showed sales of £40.1 million (2013: £31.8 million), adjusted EBITDA of £6.3 million (2013: £4.8 million).
| Initial investment date: | June 2010 |
| Cost: | £260,000 |
| Valuation: | £274,000 |
| Equity held: | <1% |
| Last audited accounts: | 31 December 2013 |
| Turnover: | £31.8 million |
| Loss before tax: | £893,000 |
| Net assets: | £40.9 million |
Arecor Limited
Background: Arecor was a spin-out from Insense (a Hygea investee company) to commercialise technology developed by Insense for enabling biologics to maintain their integrity without the need for refrigeration - this both reduces cost and also helps supply chain logistics in developing countries where temperature monitored cold storage facilities are in short supply. The technology also assists in maintaining the integrity and function of proteins exposed to ionizing radiation as the means of sterilisation.
Update since 2013: the company is transitioning from a research based enterprise into a sustainable commercial organization. It has yet to convert feasibility studies into licences, but is meeting the success criteria on two licensable feasibility projects, at least one of which is expected to complete in 2014/15.
| Initial investment date: | January 2008 |
| Cost: | £127,000 |
| Valuation: | £132,000 |
| Equity held: | 2.1% |
| Last audited accounts: | 31 May 2014 |
| Turnover: | £1.8 million |
| Profit before tax: | £144,000 |
| Net assets: | £629,000 |
ImmunoBiology Limited
Background: ImmunoBiology is a biotechnology company that is focused on developing treatment areas such as meningitis, tuberculosis, influenza and hepatitis C. The company's technology is based on the discovery that a group of proteins known as 'heat shock proteins' has a pivotal role in controlling the normal immune response to infections - it has also licensed in Scancell's immunobody technology (see above) for use in certain treatments - both approaches seek to educate the immune system how to respond.
Update since 2013: the focus is currently on a vaccine for Pneumococcal Disease, for which the challenge is that there are >90 strains in circulation but present treatments address only a small proportion. The next key step is a Phase I study in man.
| Initial investment date: | November 2005 |
| Cost: | £868,000 |
| Valuation: | £126,000 |
| Equity held: | 3.3% |
| Last audited accounts: | 31 May 2014 |
| Turnover: | £nil |
| Loss before tax: | £793,000 |
| Net assets: | £2.2 million |
Exosect Limited
Background: Exosect was established in 2001 as a spin-out from the University of Southampton to develop a
platform technology and associated range of natural bio-control products for the protection of food from pests and disease - the objective is to develop intelligent solutions to pest management and overcome the drawbacks of conventional pesticides.
Update since 2013: Exosect continues to make good technical progress in demonstrating that its technology can reduce the rates of active ingredients and biological agents in key segments, such as grain storage and seed treatments. Steady progress is being made in securing licence deals with major agricultural companies.
| Initial investment date: | January 2010 |
| Cost: | £250,000 |
| Valuation: | £125,000 |
| Equity held: | 1.7% |
| Last audited accounts: | 31 December 2013 |
| Turnover: | £559,000 |
| Loss before tax: | £1.3 million |
| Net assets: | £4.0 million |
Directors' Report
The Directors present their report and the audited financial statements for the year ended 31 December 2014.
This report has been prepared by the Directors in accordance with the requirements of s415 of the Companies Act 2006. The Company's independent auditor is required by law to report on whether the information given in the Directors' Report (including the Business Review) is consistent with the financial statements. The auditor's opinion is included in their report.
Principal Activity and Status
The principal activity of the Company is to provide shareholders with an attractive income and capital return by investing its funds in a portfolio of unquoted and quoted UK MedTech companies which meet the relevant criteria under the VCT Rules.
On 21 January 2010, the Company revoked investment company status.
The Company has been granted full approval as a Venture Capital Trust by HMRC. In order to maintain approved status, the Company must comply on a continuing basis with the provisions of s274 of the Income Tax Act 2007; in particular, the Company is required at all times to hold at least 70% of its investments (as defined in the legislation) in VCT qualifying holdings, of which at least 30% must comprise eligible ordinary shares.
For this purpose, a "VCT qualifying holding" consists of up to £5 million invested in any one year in new shares or securities of a UK AIM quoted company or an unquoted company which is carrying on a qualifying trade, and whose gross assets and number of employees at the time of investment do not exceed a prescribed limit. The definition of "qualifying trade" excludes certain activities such as property investment and development, financial services and asset leasing.
The accounts have been prepared in accordance with the requirements of the Companies Act 2006. The Directors are required by the articles of association to propose an ordinary resolution at the Company's annual general meeting in 2015 that the Company should continue as a Venture Capital Trust for a further three year period, and at three yearly intervals thereafter. If any such resolution is not passed, the Directors shall within four months convene a general meeting to consider the proposals for the reorganisation or winding-up of the Company.
Review of Business Activities
The Directors are required by s417 of the Companies Act 2006 to include a Business Review to shareholders. The Business Review is set out in the Report and Accounts and also includes the Chairman's Statement and the Investment Review.
The purpose of this review is to provide shareholders with a snapshot summary setting out the business objectives of the Company, the Board's strategy to achieve those objectives, the risks faced, the regulatory environment and the key performance indicators used to measure performance.
Since the year end there have been no significant post balance sheet events.
Results and dividend | Year ended | Year ended |
31 December 2014 | 31 December 2013 | |
£'000 | £'000 | |
Net return attributable to shareholders | (495) | (1,522) |
Appropriations: | ||
| Interim dividend paid - 0p per share (2013 - 3p) | - | (243) |
Directors
The Directors of the Company during the period and their interests (in respect of which transactions are notifiable under Disclosure and Transparency Rule 3.1.2R) in the issued ordinary shares of 50p are shown in the table below:
31 December 2014 | 31 December 2013 | |
| James Otter (Chairman) | 24,050 | 24,050 |
| John Hustler | 190,000 | 190,000 |
| Charles Breese | 105,000 | 105,000 |
All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2014 and the date of this report.
Under the Company's Articles of Association, one-third of the Directors are required to retire by rotation each year. The Board is satisfied that, following individual performance evaluations, Mr James Otter continues to be effective and to demonstrate commitment to the role and therefore offers himself for re-election with the support of the Board.
Brief biographical notes on the Directors are given in the Report and Accounts.
Directors' and Officers' Liability Insurance
The Company has maintained directors' and officers' liability insurance cover on behalf of the Directors and Company Secretary. The Company's Articles of Association provide, subject to provisions of UK legislation, an indemnity for directors in respect of costs which they may incur relating to the defence of any proceedings brought against them arising out of their positions as directors, in which they are acquitted or judgement is given in their favour by the Court.
Whistleblowing
The Board has considered and implemented arrangements in accordance with the Combined Code's recommendations, to encourage staff of the Administration Manager and the Secretary of the Company to raise concerns, in confidence, within their organisation about possible improprieties in matters of financial reporting or other matters. It is therefore satisfied that adequate arrangements are in place to allow an independent investigation, and follow on action where necessary, to take place within the organisation.
Management
Since 30 July 2007 the Board has assumed responsibility for the management of the Company and its portfolio. The Board continues to review and evaluate the management of the Company in the light of present circumstances whereby the resources of the Company are fully invested in portfolio companies. It does not believe that it would be cost effective to seek to appoint a third party manager at the present time. The terms of the Board's remuneration are set out in the Directors' Remuneration Report.
Share Issues and Open Offers
During the year, the Company did not issue any shares (2013 - nil shares).
Share Capital, Rights Attaching to the Shares and Restrictions on Voting and Transfer
The Company's issued ordinary share capital as at 31 December 2014 is 8,115,376 ordinary shares of 50p each.
Subject to any suspension or abrogation of rights pursuant to relevant law or the Company's Articles of Association, the shares confer on their holders the following principal rights:
(a) the right to receive out of profits available for distribution such dividends as may be agreed to be paid (in the case of a final dividend in an amount not exceeding the amount recommended by the Board as approved by shareholders in a general meeting or in the case of an interim dividend in an amount determined by the Board). All dividends unclaimed for a period of 12 years after having become due for payment are forfeited automatically and cease to remain owing by the Company;
(b) the right, on a return of assets on a liquidation, reduction of capital or otherwise, to share in the surplus assets of the Company remaining after payment of its liabilities pari passu with the other holders of Ordinary shares; and
(c) the right to receive notice of and to attend and speak and vote in person or by proxy at any general meeting of the Company.
On a show of hands every member present or represented and voting has one vote and on a poll every member present or represented and voting has one vote for every share of which that member is the holder; the appointment of a proxy must be received not less than 48 hours before the time of the holding of the relevant meeting or adjourned meeting or, in the case of a poll taken otherwise than at or on the same day as the relevant meeting or adjourned meeting, be received after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll.
These rights can be suspended. If a member, or any other person appearing to be interested in shares held by that member, has failed to comply within the time limits specified in the Company's Articles of Association with a notice pursuant to s793 of the Companies Act 2006 (notice by the Company requiring information about interests in its shares), the Company can, until the default ceases, suspend the right to attend and speak and vote at a general meeting and if the shares represent at least 0.25% of their class the Company can also withhold any dividend or other money payable in respect of the shares (without any obligation to pay interest) and refuse to accept certain transfers of the relevant shares.
Shareholders, either alone or with other shareholders, have other rights as set out in the Company's Articles of Association and in company law.
A member may choose whether his shares are evidenced by share certificates (certificated shares) or held in electronic (uncertificated) form in CREST (the UK electronic settlement system). Any member may transfer all or any of his shares, subject, in the case of certificated shares, to the rules set out in the Company's Articles of Association, or in the case of uncertificated shares, to the regulations governing the operation of CREST (which allow the Directors to refuse to register a transfer as therein set out); the transferor remains the holder of the shares until the name of the transferee is entered in the register of members.
The Directors may refuse to register a transfer of certificated shares in favour of more than four persons jointly or where there is no adequate evidence of ownership or the transfer is not duly stamped (if so required). The Directors may also refuse to register a share transfer if it is in respect of a certificated share which is not fully paid up or on which the Company has a lien provided that, where the share transfer is in respect of any share admitted to the Official List maintained by the UK Listing Authority, any such discretion may not be exercised so as to prevent dealings taking place on an open and proper basis, or if in the opinion of the Directors (and with the concurrence of the UK Listing Authority) exceptional circumstances so warrant, provided that the exercise of such power will not disturb the market in those shares.
Whilst there are no squeeze-out and sell out rules relating to the shares in the Company's Articles of Association, shareholders are subject to the compulsory acquisition provisions in s974 to s991 of the Companies Act 2006.
Appointment and Replacement of Directors
A person may be appointed as a Director of the Company by the shareholders in general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant resolution) or by the Directors; no person, other than a Director retiring by rotation or otherwise, shall be appointed or reappointed a Director at any general meeting unless he is recommended by the Directors or, not less than seven nor more than 42 clear days before the date appointed for the meeting, notice is given to the Company of the intention to propose that person for appointment or re-appointment in the form and manner set out in the Company's Articles of Association.
Each Director who is appointed by the Directors (and who has not been elected as a Director of the Company by the members at a general meeting held in the interval since his appointment as a Director of the Company) is to be subject to election as a Director of the Company by the members at the first Annual General Meeting of the Company following his appointment. At each Annual General Meeting of the Company one third of the Directors for the time being, or if their number is not three or an integral multiple of three the number nearest to but not exceeding one-third, are to be subject to re-election.
The Companies Act allows shareholders in a general meeting by Ordinary Resolution (requiring a simple majority of the persons voting on the relevant Resolution) to remove any Director before the expiration of his or her period of office, but without prejudice to any claim for damages which the Director may have for breach of any contract of service between him or her and the Company.
A person also ceases to be a Director if he or she resigns in writing, ceases to be a Director by virtue of any provision of the Companies Act, becomes prohibited by law from being a Director, becomes bankrupt or is the subject of a relevant insolvency procedure, or becomes of unsound mind, or if the Board so decides following at least six months' absence without leave or if he or she becomes subject to relevant procedures under the mental health laws, as set out in the Company's Articles of Association.
Powers of the Directors
Subject to the provisions of the Companies Act, the Memorandum and Articles of Association of the Company and any directions given by shareholders by Special Resolution, the Articles of Association specify that the business of the Company is to be managed by the directors, who may exercise all the powers of the Company, whether relating to the management of the business or not. In particular the directors may exercise on behalf of the Company its powers to purchase its own shares to the extent permitted by shareholders.
International Financial Reporting Standards
As the Company is not part of a group it is not mandatory for it to comply with International Financial Reporting Standards. The Company does not anticipate that it will voluntarily adopt International Financial Reporting Standards.
Creditor Payment Policy
The Company's payment policy for the forthcoming financial year is to agree terms of payment before business is transacted and to settle accounts in accordance with those terms. The Company does not follow any code or standard with regard to creditor payment practice. Trade creditors at 31 December 2014 were £7,000 (2013: £nil).
Environmental Policy
The Company always makes full effort to conduct its business in a manner that is responsible to the environment. This responsibility is always maintained in investment decisions where possible.
Going Concern
The Company's business activities and the factors likely to affect its future performance and position are set out in the Chairman's Statement and Investment Review. Further details on the management of financial risk may be found in note 14 to the Financial Statements.
The Board receives regular reports from the Administration Manager and the Directors believe that, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
The assets of the Company consist mainly of cash resources and securities, some of which are readily realisable. As such, the Company has adequate financial resources to continue in operational existence for the foreseeable future.
Substantial Shareholdings
At 31 December 2014, no disclosure of major shareholdings had been made to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).
On 13 January 2015 James Leek disclosed an increase in shareholding to 3.099% (251,500 shares). No other changes have been notified since that date.
Annual General Meeting
Notice convening the 2015 Annual General Meeting of the Company and a form of proxy in relation to the meeting can each be found at the end of this announcement.
Independent Auditor
James Cowper Kreston are engaged as the Company's auditors and they offer themselves for reappointment as auditor. A resolution to re-appoint James Cowper Kreston will be proposed at the forthcoming Annual General Meeting.
Directors' Authority to Allot Shares, to Disapply Pre-emption Rights
Resolution 8 renews the Directors' authority to allot Ordinary shares. This would enable the Directors until May 2015, to allot up to 811,537 ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2014).
Resolution 9 renews the Directors' authority to allot equity securities for cash without pre-emption rights applying in certain circumstances. This Resolution would authorise the Directors, until the date falling 15 months after the date of the passing of the Resolution or, if earlier, the conclusion of the next Annual General Meeting of the Company, to issue Ordinary shares for cash without pre-emption rights applying by way of an offer to existing shareholders, or re-issuing shares out of Treasury, up to a maximum of 811,537 Ordinary shares (representing approximately 10% of the Company's issued share capital as at 31 December 2014). This power will be exercised only if, in the opinion of the Directors, it would be in the best interests of shareholders, as a whole.
By Order of the Board
Craig Hunter
Company Secretary
30 March 2015
Directors' Remuneration Report
Introduction
This report is submitted in accordance with the requirements of s420-422 of the Companies Act 2006, in respect of the year ended 31 December 2014. Resolutions to approve the directors' remuneration report and the statement of directors' remuneration policy will be proposed at the Annual General Meeting on 14 May 2015.
The Company's independent auditor, James Cowper Kreston, is required to give its opinion on certain information included in this report as indicated below. Their report on these and other matters is set out in the Report and Accounts.
Consideration by the Directors of Matters Relating to Directors' Remuneration
The Board as a whole considers Directors' remuneration and has not appointed a separate committee in this respect. The Board has not sought advice or services from any person in respect of its consideration of Directors' remuneration during the year (although the Directors expect from time to time to review the fees against those paid to the boards of directors of other VCTs).
Statement of the Company's policy on Directors' Remuneration
The Board manages the Company and consists of three Directors, who meet formally as a Board at least four times a year and on other occasions as necessary, to deal with the important aspects of the Company's affairs. The Directors, as members of the Commercial Advisory Committee ('CAC'), are responsible for the investment management of the Company. Directors are appointed with the expectation that they will serve for, at least, a period of three years. All Directors retire at the first general meeting after election and thereafter one third of all Directors are subject to retirement by rotation at subsequent Annual General Meetings. Re-election will be recommended by the Board but is dependent upon a shareholder vote.
Each Director has received a letter of appointment. A Director may resign by notice in writing to the Board at any time. The Directors are entitled to compensation payable upon early termination of their contract in respect of any unexpired notice period and a pro rata proportion of any performance fees payable to the Commercial Advisory Committee up to five years from the date of resignation.
The Company's policy is that the fees payable to the Directors should reflect the time spent by the Board on the Company's affairs and the responsibilities borne by the Directors. They should be sufficient to attract candidates of high calibre to be recruited. The policy is for the Chairman of the Board to be paid higher fees than the other Directors in recognition of his more onerous role.
The Company's policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears. The fees are not specifically related to the Directors' performance, either individually or collectively. The fee for the Chairman is £20,000 per annum and for other Directors is £17,500 per annum, which have remained unaltered since 1 October 2009. It is not proposed to increase these fees in 2015.
In accordance with an agreement dated 30 July 2007, as amended by the agreement approved at the 2014 AGM, when the Board, acting as the CAC, assumed management of the Company, the Directors, as members of the CAC, are also entitled to participate in a performance incentive fee ('PIF'). The PIF is calculated as 20% of sums returned to shareholders by way of dividends and capital distributions of whatever nature, which in aggregate exceeds the sum of 80p per share (including dividends paid to date, i.e. 24.25p, but excluding any sums returned to shareholders from HMRC in the year of subscription). At 31 December 2014, performance incentive fees have been provided in the accounts in the sum of £702,000 but are not yet due (2013: £825,000).
The Board is also entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them respectively whilst conducting their duties as Directors.
Company Performance
The Board is responsible for the Company's investment strategy and performance. The performance graph in the Report and Accounts shows the performance of the Company.
Directors' Emoluments (Information Subject to Audit)
Amount of each Director's emoluments:
Directors' fees | Year ended | Year ended |
31 December 2014 | 31 December 2013 | |
£ | £ | |
| James Otter (Chairman) | 20,000 | 20,000 |
| John Hustler | 17,500 | 17,500 |
| Charles Breese | 17,500 | 17,500 |
| Total | 55,000 | 55,000 |
The Directors did not receive any other form of emoluments in addition to the directors' fees during the year. The Directors, as members of the CAC, may be entitled to performance fees as provided in the accounts amounting to £702,000. Directors may be entitled to fees from investee companies when acting on the Company's behalf as Director, Observer or Consultant to those investees.
Craig Hunter
Company Secretary
30 March 2015
Income Statement | ||||||
| Year to 31 December 2014 | ||||||
| Revenue | Capital | Total | ||||
| Notes | £'000 | £'000 | £'000 | |||
| Gain on disposal of fixed asset investments | - | 60 | 60 | |||
| Loss on valuation of fixed asset investments | 9 | - | (527) | (527) | ||
| Performance fee | - | 123 | 123 | |||
| Income | 2 | 12 | - | 12 | ||
| Other expenses | 3 | (163) | - | (163) | ||
| Return on ordinary activities before tax | (151) | (344) | (495) | |||
| Taxation on return on ordinary activities | 5 | - | - | - | ||
| Return on ordinary activities after tax | (151) | (344) | (495) | |||
| Earnings per share - basic and diluted | 7 | (1.9p) | (4.2p) | (6.1p) | ||
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The accompanying notes are an integral part of the financial statements.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the year as set out above.
Income Statement
| Year to 31 December 2013 | ||||
| Revenue | Capital | Total | ||
| Notes | £'000 | £'000 | £'000 | |
| Gain on disposal of fixed asset investments | - | 156 | 156 | |
| Loss on valuation of fixed asset investments | - | (1,896) | (1,896) | |
| Performance fee | - | 382 | 382 | |
| Income | 2 | 11 | - | 11 |
| Other expenses | 3 | (175) | - | (175) |
| Return on ordinary activities before tax | (164) | (1,358) | (1,522) | |
| Taxation on return on ordinary activities | 5 | - | - | - |
| Return on ordinary activities after tax | (164) | (1,358) | (1,522) | |
| Earnings per share - basic and diluted | 7 | (2.0p) | (16.7p) | (18.7p) |
- The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
- All revenue and capital items in the above statement derive from continuing operations.
- The accompanying notes are an integral part of the financial statements.
- The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
The Company has no recognised gains or losses other than the results for the year as set out above.
| Reconciliation of Movements in Shareholders' Funds | ||
| Year ended 31 December 2014 | Year ended 31 December 2013 | |
| £'000 | £'000 | |
| Shareholders' funds at start of year | 7,829 | 9,594 |
| Return on ordinary activities after tax | (495) | (1,522) |
| Issue of equity (net of expenses) | - | - |
| Dividends paid | - | (243) |
| Shareholders' funds at end of year | 7,334 | 7,829 |
| Balance Sheet | |||||
| As at 31 December 2014 | As at 31 December 2013 | ||||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| Fixed asset investments* | 9 | 8,072 | 8,603 | ||
| Current assets: | |||||
| Debtors | 10 | 8 | 75 | ||
| Cash at bank | 16 | 30 | |||
| 24 | 105 | ||||
| Creditors: amounts falling due within one year | 11 | (762) | (879) | ||
| Net current assets | (738) | (774) | |||
| Net assets | 7,334 | 7,829 | |||
| Called up equity share capital | 12 | 4,058 | 4,058 | ||
| Share premium | 13 | - | - | ||
| Special distributable reserve | 13 | 3,397 | 3,397 | ||
| Capital redemption reserve | 13 | 38 | 38 | ||
| Capital reserve - gains and losses on disposals | 13 | (165) | (315) | ||
| - holding gains and losses | 13 | 1,495 | 1,989 | ||
| Revenue reserve | 13 | (1,489) | (1,338) | ||
| Total equity shareholders' funds | 7,334 | 7,829 | |||
| Net asset value per share | 8 | 90.4p | 96.5p | ||
*At fair value through Income Statement
The accompanying notes are an integral part of the financial statements.
The statements were approved by the Directors and authorised for issue on 30 March 2015 and are signed on their behalf by:
James Otter
Chairman
Company No: 04221489
| Cash Flow Statement | ||||
| Year to 31 December 2014 | Year to 31 December 2013 | |||
| Notes | £'000 | £'000 | ||
| Net cash (Outflow)/inflow from operating activities | (78) | (205) | ||
| Financial investment: | ||||
| Purchase of fixed asset investments | 9 | (70) | (623) | |
| Disposal of fixed asset investments | 134 | 989 | ||
| Financing: | ||||
| Issue of shares | - | - | ||
| Dividends paid | - | (243) | ||
| Decrease in cash resources at bank | (14) | (82) | ||
| Reconciliation of Net Cash Flow to Movement in Net Funds | |||
| Year to 31 December 2014 | Year to 31 December 2013 | ||
| £'000 | £'000 | ||
| (Decrease)/increase in cash resources at bank | (14) | (82) | |
| Opening net funds | 30 | 112 | |
| Net funds at 31 December* | 16 | 30 | |
* Net funds at 31 December 2013 and 31 December 2014 comprised solely of cash at bank
| Reconciliation of Operating profit/(loss) before Taxation to Cash Flow from Operating Activities | |||
| Year to 31 December 2014 | Year to 31 December 2013 | ||
| £'000 | £'000 | ||
| Return on ordinary activities before tax | (495) | (1,522) | |
| (Gain)/loss on disposal of fixed asset investments | (60) | (156) | |
| Loss/(gain) on valuation of fixed asset investments | 527 | 1,896 | |
| Decrease/(increase) in debtors | 67 | (67) | |
| (Decrease)/increase in creditors | (117) | (356) | |
| Inflow/(outflow) from operating activities | (78) | (205) | |
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of accounting
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice (SORP) "Financial Statements of Investment Trust Companies" (revised 2009).
The principal accounting policies have remained unchanged from those set out in the Company's 2013 Annual Report and financial statements. A summary of the principal accounting policies is set out below.
The Company has designated all fixed asset investments as being held at fair value through profit and loss; therefore all gains and losses arising from investments held are attributable to financial assets held at fair value through Income Statement. Accordingly, all interest income, fee income, expenses and impairment losses are attributable to assets designated as being at fair value through Income Statement.
The preparation of the financial statements requires the Board to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments particularly unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.
Capital valuation policies are those that are most important to the depiction of the Company's financial position and that requires the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The critical accounting policies that are declared will not necessarily result in material changes to the financial statements in any given period but rather contain a potential for material change. The main accounting and valuation policies used by the Company are disclosed below. Whilst not all of the significant accounting policies require subjective or complex judgements, the Company considers that the following accounting policies should be considered critical.
Although the Company believes that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could require changes in the stated values. This could lead to additional changes in fair value in the future.
Investments
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).
These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 26, the investments will be designated as fair value through Income Statement on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy. The Company's investments are measured at subsequent reporting dates at fair value.
In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. This is consistent with the International Private Equity and Venture Capital (IPEVC) guidelines.
In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple and net assets. This is consistent with IPEVC valuation guidelines.
Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - holding gains/(losses).
In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.
Current asset investments
No current asset investments were held at 31 December 2014 or 31 December 2013. Should current assets be held, gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - gains/(losses) on disposal.
Income
Investment income includes interest earned on bank balances and from unquoted loan note securities. Fixed returns on debt are recognised on a time apportionment basis so as to reflect the effective yield, provided there is no reasonable doubt that payment will be received in due course.
Expenses
All expenses are accounted for on an accruals basis. Expenses are charged wholly to revenue with the exception of the performance fee, which has been charged 100% to the capital reserve.
Revenue and capital
The revenue column of the Income Statement includes all income and revenue expenses of the Company. The capital column includes gains and losses on disposal and holding gains and losses on investments. Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the appropriate capital reserve on the basis of whether they are readily convertible to cash in full at the balance sheet date.
Taxation
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the "marginal" basis as recommended in the SORP.
Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date. Where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less tax, with the exception that deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing can be deducted.
Cash and liquid resources
Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities, investment grade bonds and investments in money market managed funds, as well as OEICs. At the year end, no liquid resources were held by the Company.
Loans and receivables
The Company's loans and receivables are initially recognised at cost and subsequently measured at fair value, being amortised cost using the effective interest rate method.
Financing strategy and capital structure
FRS 29 'Financial Instruments: Disclosures' comprises disclosures relating to financial instruments.
Capital is defined as shareholders' funds and the financial strategy in the medium term is to manage a level of cash that balances the risks of the business with optimising the return on equity.
Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument.
Capital management is monitored and controlled using the internal control procedures set out in the Report and Accounts. The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.
The Company does not have any externally imposed capital requirements.
Dividends
Dividends payable are recognised as distributions in the financial statements when the Company's liability to make payment has been established. This liability is established for interim dividends when they are declared by the Board, and for final dividends when they are approved by the shareholders.
2. Income
| Year to 31 December 2014 | Year to 31 December 2013 | |
| £'000 | £'000 | |
| Dividends received | 2 | - |
| Bank interest receivable | - | 1 |
| Loan note interest receivable | 10 | 10 |
| 12 | 11 |
3. Other Expenses
| Year to 31 December 2014 | Year to 31 December 2013 | |
| £'000 | £'000 | |
| Directors' remuneration | 55 | 55 |
| Fees payable to the Company's auditor for the audit of the financial statements | 8 | 8 |
| Fees payable to the Company's auditor for other services - tax compliance | 1 | 1 |
| Legal and professional expenses | 57 | 56 |
| Accounting and administration services | 35 | 40 |
| Other expenses | 7 | 15 |
| 163 | 175 |
For the year ended 31 December 2014 the running costs were 2.2% (2013: 2.2%) of net assets.
4. Directors' Remuneration
| Year to 31 December 2014 | Year to 31 December 2013 | |
| £'000 | £'000 | |
| Directors' emoluments | ||
| James Otter (Chairman) | 20.0 | 20.0 |
| John Hustler | 17.5 | 17.5 |
| Charles Breese | 17.5 | 17.5 |
| 55.0 | 55.0 |
None of the Directors received any other remuneration from the Company during the year. The Company has no employees other than non-executive Directors. The average number of non-executive Directors in the year was three (2013: three).
5. Tax on Ordinary Activities
The corporation tax charge for the period was £nil (2013: £nil)
The current rate of tax is the small companies' rate of corporation tax at 20% (2013: 20.0%)
| Current tax reconciliation: | Year to 31 December 2014 | Year to 31 December 2013 |
| £'000 | £'000 | |
| Return on ordinary activities before tax | (151) | (164) |
| Current tax at 20.0% (2012: 20.0%) | (30) | (33) |
| Unrecognised tax losses | 30 | 33 |
| Total current tax charge | - | - |
Approved VCTs are exempt from tax on capital gains within the Company. Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
6. Dividends
| Year to 31 December 2014 | Year to 31 December 2013 | |
| £'000 | £'000 | |
| Recognised as distributions in the financial statements for the period | ||
| Previous year's interim dividend | - | - |
| Previous year's final dividend | - | - |
| - | - | |
| Paid and proposed in respect of the year | ||
| Interim dividend paid - 0p per share (2013: 3.0p per share) | - | 243 |
| - | 243 |
7. Earnings per Share
The total earnings per share is based on 8,115,376 (31 December 2013: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a return for the year totalling (£495,000) (31 December 2013: (£1,522,000)).
The revenue and capital earnings per share are based on 8,115,376 (31 December 2013: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a revenue return for the year totalling (£151,000) (31 December 2013: (£164,000)) and a capital return for the year totalling (£344,000) (31 December 2013: (£1,358,000)).
There are no potentially dilutive capital instruments in issue and, therefore, no diluted returns per share figures are relevant. The basic and diluted earnings per share are therefore identical.
8. Net Asset Value per Share
The calculation of NAV per share as at 31 December 2014 is based on 8,115,376 (31 December 2013: 8,115,376) ordinary shares in issue at that date.
9. Fixed Asset Investments
| Level 1: AIM-quoted investments | Level 3: Unquoted investments | Level 3: Unquoted investments | ||
| Equity investments | Equity investments | Loan investments | Total investments | |
| £'000 | £'000 | £'000 | £'000 | |
| Valuation and net book amount: | ||||
| Book cost as at 1 January 2014 | 1,617 | 4,861 | 135 | 6,613 |
| Cumulative revaluation | 3,962 | (1,972) | - | 1,990 |
| Valuation at 1 January 2014 | 5,579 | 2,889 | 135 | 8,603 |
| Movement in the year: | ||||
| Purchases at cost | - | 70 | - | 70 |
| Disposal proceeds | (130) | (4) | - | (134) |
| Gain/(loss) on disposal | 56 | 4 | - | 60 |
| Loan converted into equity | - | 135 | (135) | - |
| Revaluation in year | (403) | (124) | - | (527) |
| Valuation at 31 December 2014 | 5,102 | 2,970 | - | 8,072 |
| Book cost at 31 December 2014: | 1,510 | 5,067 | - | 6,577 |
| Revaluation to 31 December 2014: | 3,592 | (2,097) | - | 1,495 |
| Valuation at 31 December 2014 | 5,102 | 2,970 | - | 8,072 |
Further details of the fixed asset investments held by the Company are shown within the Investment Review.
All investments are designated as fair value through profit or loss at the time of acquisition, and all capital gains or losses on investments so designated. Given the nature of the Company's venture capital investments, the changes in fair value of such investments recognised in these financial statements are not considered to be readily convertible to cash in full at the balance sheet date and accordingly these gains are treated as holding gains or losses.
10. Debtors
| 31 December 2014 | 31 December 2013 | |
| £'000 | £'000 | |
| Prepayments and accrued income | 8 | 75 |
| 8 | 75 |
11. Creditors: Amounts Falling Due Within One Year
| 31 December 2014 | 31 December 2013 | |
| £'000 | £'000 | |
| Accruals | 726 | 850 |
| Trade creditors | 7 | - |
| Other creditors | 29 | 29 |
| 762 | 879 |
12. Share Capital
| 31 December 2014 | 31 December 2013 | |
| £'000 | £'000 | |
| Authorised: | ||
| 50,000,000 Ordinary shares of 50p | 25,000 | 25,000 |
| Allotted and fully paid up: | ||
| 8,115,376 Ordinary shares of 50p (2013: 8,115,376) | 4,058 | 4,058 |
The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set out in the Report and Accounts. The Company is not subject to any externally imposed capital requirements.
During the year, the Company did not issue any shares.
13. Reserves
| Share Capital | Special distributable reserve | Capital redemption reserve | Capital reserve gains/(losses) | Capital reserve holding gains/(losses) | Revenue reserve | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 January 2014 | 4,058 | 3,397 | 38 | (315) | 1,989 | (1,338) |
| Return on ordinary activities after tax | - | - | - | - | - | (151) |
| Cancellation of Share Premium | - | - | - | - | - | - |
| Performance fee allocated as capital expenditure | - | - | - | 123 | - | - |
| Current period gains on disposal | - | - | - | 60 | - | - |
| Current period losses on fair value of investments | - | - | - | - | (527) | - |
| Prior years' unrealised losses now realised | - | - | - | (33) | 33 | - |
| Dividends paid | - | - | - | - | - | - |
| Balance as at 31 December 2014 | 4,058 | 3,397 | 38 | (165) | 1,495 | (1,489) |
When the Company revalues its investments during the period, any gains or losses arising are credited/charged to the income statement. Changes in fair value of investments held are then transferred to the capital reserve - holding gains/(losses). When an investment is sold any balance held on the capital reserve - holding gains/(losses) reserve is transferred to the capital reserve - gains/(losses) on disposal as a movement in reserves.
The purpose of the special distributable reserve was to create a reserve which will be capable of being used by the Company to pay dividends and for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount at which the Company's shares trade to net asset value, providing shareholder authority has been granted.
During 2010, the Company revoked investment company status in order to allow payment of dividends from distributable reserves. Distributable reserves are represented by the special distributable reserve, the capital reserve gains/(losses) on disposal and the revenue reserve which total £1,743,000 as at 31 December 2014.
14. Financial Instruments and Risk Management
The Company's financial instruments comprise equity and loan note investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy of investing mainly in a portfolio of VCT - qualifying quoted and unquoted securities whilst holding a proportion of its assets in cash or near - cash investments in order to provide a reserve of liquidity.
Fixed asset investments (see note 9) are valued at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet. The Directors believe that the fair value of the assets held at the year end is equal to their book value.
In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are price risk, interest rate risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.
Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as set out in the Report and Accounts. The management of market risk is part of the investment management process and is a central feature of venture capital investment. The Company's portfolio is managed with regard to the possible effects of adverse price movements and with the objective of maximising overall returns to shareholders. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.
Details of the Company's investment portfolio at the balance sheet date are set in the Report and Accounts.
40.5% (2013: 38.6%) by value of the Company's net assets comprises investments in unquoted companies held at fair value. The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 December 2014 would have increased net assets and the total return for the year by £297,000 (2013: £302,000) an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
69.6% (2013: 71.3%) by value of the Company's net assets comprises equity securities listed on the London Stock Exchange or quoted on AIM. A 10% increase in the bid price of these securities as at 31 December 2014 would have increased net assets and the total return for the year by £510,000 (2013: £558,000); a corresponding fall would have reduced net assets and the total return for the year by the same amount.
Credit risk
There were no significant concentrations of credit risk to counterparties at 31 December 2014 or 31 December 2013.
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Board carries out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date.
At 31 December 2014 the Company's financial assets exposed to credit risk comprised the following:
| 31 December 2014 £000 | 31 December 2013 £000 | ||
| Cash at bank | 16 | 30 | |
| Unquoted investments - loans | - | 135 | |
| 16 | 165 |
The Company's interest-bearing deposit and current accounts are maintained with The Royal Bank of Scotland plc.
Liquidity risk
The Company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid. They also include investments in AIM-quoted companies, which, by their nature, involve a higher degree of risk than investments on the main market. As a result, the Company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.
The Company's liquidity risk is managed on a continuing basis by the Board in accordance with policies and procedures laid down by the Board. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient cash facilities to pay accounts payable and accrued expenses. At 31 December 2014, the Company's cash balance was £16,000 (2013: £30,000).
15. Post Balance Sheet Events
There have been no material transactions since the balance sheet date and the date of the publication of this report.
16. Contingencies, Guarantees and Financial Commitments
There were no contingencies, guarantees or financial commitments as at 31 December 2014 (2013: £nil).
17. Related Party Transactions
The Board acts as the investment manager of the Company. No remuneration has been paid to the Board during the year in its capacity as investment manager. The Directors are entitled to participate in a performance bonus calculated as 20% of sums returned to shareholders by way of dividends and capital distributions of whatever nature, which in aggregate exceeds the sum of 80p per share (including dividends paid to date, i.e. 24.25p, but excluding any sums returned to shareholders from HMRC in the year of subscription). At the 31 December 2014, there was £702,000 accrued (2013: £825,000) in performance fees. The Board is also entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them respectively whilst conducting their duties as Directors.
Mr Otter was CEO of Axon until November 2013. During 2014 he received no salary from this company (2013: £52,000). Mr Otter is in dispute with Axon concerning outstanding salary, share options and unpaid expenses.
Mr Otter remains an Observer on the Board of Hallmarq for which he received a fee from this company during the year of £6,000.
Mr Breese is a director of OR Productivity and received £ 10,000 from this company in fees for his support during the year.
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of Hygea vct plc ("the Company") will be held at the offices of Octopus Investments, 33 Holborn, London, EC1N 2HT on Thursday 14 May 2015 at 12.00 noon for the following purposes:
ORDINARY BUSINESS
To consider and if thought fit, pass the following as Ordinary Resolutions
- That the Directors' Annual Report and Accounts and the auditors' report thereon for the year ended 31 December 2014 be received and adopted.
- That the Directors' remuneration report in respect of the year ended 31 December 2014 be received and adopted.
- That James Otter be re-elected as a Director of the Company.
- That James Cowper Kreston be re-appointed as auditors of the Company until the conclusion of the next Annual General Meeting of the Company at which accounts are laid before the Members.
- That the Directors be authorised to determine the auditor's remuneration.
- That the company should continue as a Venture Capital Trust for a further three year period.
SPECIAL BUSINESS
- AUTHORITY TO ALLOT RELEVANT SECURITIES
That the Directors be and are generally and unconditionally authorised in accordance with s551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company up to a maximum nominal amount of £405,767 (representing approximately 10% of the Ordinary share capital in issue at today's date) such authority to expire at the later of the conclusion of the Company's Annual General Meeting next following the passing of this Resolution and the expiry of 15 months from the passing of the relevant Resolution (unless previously revoked, varied or extended by the Company in a general meeting but so that such authority allows the Company to make offers or agreements before the expiry thereof, which would or might require relevant securities to be allotted after the expiry of such authority).
To consider and, if thought fit, pass the following as a Special Resolution:
- EMPOWERMENT TO MAKE ALLOTMENTS OF EQUITY SECURITIES
THAT the Directors pursuant to s571 of the Companies Act 2006 be empowered to allot or make offers or agreements to allot equity securities (as defined in s560(1) of the said Act) for cash pursuant to the authority referred to in Resolution 7 as if s561 (1) of the Act did not apply to any such allotments and so that:
- reference to allotment in this Resolution shall be construed in accordance with s560(2) of the Act; and
- the power conferred by this Resolution shall enable the Company to make any offer or agreement before the expiry of the said power which would or might require equity securities to be allotted after the expiry of the said power and the Directors may allot equity securities in pursuance of such offer or agreement notwithstanding the expiry of such power.
And this power, unless previously varied, revoked or renewed, shall come to an end at the conclusion of the Annual General Meeting of the Company next following the passing of this Resolution or, if earlier, on the expiry of 15 months from the passing of this Resolution.
| By order of the Board | Registered office: 39 Alma Road St Albans AL1 3AT |
| Craig Hunter Company Secretary |
NOTES:
(a) A member entitled to attend and vote at the Annual General Meeting may appoint one or more proxies to attend and vote on his or her behalf. A proxy need not be a member.
(b) A form of proxy is enclosed which, to be effective, must be completed and delivered to the registrars of the Company, Capita Registrars, Proxies Department, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received by no later than 48 hours before the time the Annual General Meeting is scheduled to begin. The completion and return of the form of proxy will not affect the right of a member to attend and vote at the Annual General Meeting.
(c) Copies of the Directors' Letters of Appointment, the Register of Directors' Interests in the Ordinary shares of the Company kept in accordance with the Listing Rules Articles of Association will be available for inspection at the registered office of the Company during usual business hours on any weekday from the date of this notice until the Annual General Meeting, and at the place of that meeting for at least 15 minutes prior to the commencement of the meeting until its conclusion.
Accounts
The financial information set out in this announcement does not constitute statutory accounts as defined in the Companies Act 2006 ("the Act"). The balance sheet as at 31 December 2014, income statement and cash flow statement for the period then ended have been extracted from the Company's 2014 statutory financial statements upon which the auditor's opinion is unqualified and does not include any statement under the section 495 of the Act.
The Annual Report and Accounts for the year ended 31 December 2014 will be filed with the Registrar of Companies.
Copies of the documents will be submitted to the National Storage Mechanism and are available for inspection at: hppp://www.morningstar.co.uk/uk/NSM
Documents:
- Report and Accounts for the year ended 31 December 2014
- Notice of Annual General Meeting
- Annual General Meeting Proxy Card
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Hygea VCT plc via Globenewswire
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