Hygea VCT plc : Annual Report and Accounts, Not...
For immediate release 11 April 2016
Hygea VCT plc ("the Company" or "Hygea")
Annual Report and Accounts for the year ended 31 December 2015
and
Notice of General Meeting
The Directors are pleased to announce the audited results of the Company for the year ended 31 December 2015 and a copy of the Annual Report and Accounts will be made available 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 2 June 2016, at 12.00 noon.
A copy of both documents will be available from the registered office of the Company at 39 Alma Road, St Albans AL1 3AT, as well as on the Company's website: www.hygeavct.com
Financial Summary
| Year to 31 December 2015 | Year to 31 December 2014 | |
| Net assets (£'000s) | 6,129 | 7,334 |
| Return on ordinary activities after tax (£'000s) | (1,205) | (495) |
| Earnings per share | (14.9p) | (6.1p) |
| Net asset value per share | 75.5p | 90.4p |
| Dividends paid since inception | 24.25p | 24.25p |
| Total return (NAV plus cumulative dividends paid) | 99.75p | 114.65p |
Enquiries:
John Hustler, Chairman on 01428 727985
Roland Cornish, Beaumont Cornish Limited on 020 7628 3396
Chairman's Statement
I am pleased to present the 2015 annual report to Shareholders in Hygea.
Overview
Against the background of the turmoil in stock markets globally, many UK smallcaps are finding it difficult to obtain finance through the established UK capital market channels and, within the smallcap universe, Life Science companies are finding it particularly difficult. The UK capital market lacks experience in successfully supporting smaller Life Science companies through their technology development stage - this is exacerbated by commercialising their technology being a lengthy process because of the challenging regulatory hurdles which are (quite rightly) in place in order to minimise risk to patients. Nevertheless, we remain confident that many of the portfolio companies are both making good progress in terms of their science and/or technology and applying the right principles to commercialisation of their Intellectual Property - both of which we expect will lead to long term success. As you will see in UK Capital Markets section below, we also believe that developments are occurring which will improve the ability of the UK capital market to support companies such as those in Hygea's portfolio.
During 2015 our net asset value has declined principally due to the reduction in the value of our AIM listed portfolio and annual running costs. As Shareholders are aware, a large percentage of the Company's net asset value is represented by the holding in Scancell plc shares. The bid price of Scancell shares at 31 December 2015 was 21.5p compared to 32p at the beginning of the year. The share price remains volatile and the latest bid price was 17p. Your Board does not believe that there is any underlying reason related to the science for the reduction in the current share price of Scancell - as you will see in the Investment Review, the company has made progress over the last year. In April 2016, Scancell announced that it had raised gross proceeds of £6.2m through a placing and open offer at 17p per share - as detailed in the Investment Review. We were prohibited from subscribing by the VCT rules (even had we had the funds available), as we would have exceeded the 15% maximum holding condition allowed in any single company (as defined within ITA07/S274(2) and S277).
On a positive note, however, we remain pleased with the progress made with some of our unquoted portfolio companies - in particular Hallmarq Veterinary Imaging Limited, Fuel 3D Limited and OR Productivity plc, further details of which can be found in the Investment Review beginning on page 5 of the Report and Accounts ("the Accounts").
Following the last Annual General Meeting ("AGM"), we announced that we would review the Board structure and this led to the retirement of James Otter both as Chairman and as a Director and the appointment of Richard Roth. The Board has also carried out a review of the cost base: amongst other savings, the salaries of Directors have been reduced and the Performance Incentive Fee has been restructured. Details of these changes can be found in the Directors' Remuneration Report and Note 4 to the accounts. Whilst we are advised that the changes to the Performance Incentive Fee do not require shareholder approval, we are asking for your approval as part of the resolution to approve the Company's Remuneration Policy and we trust you will find these changes beneficial to Shareholders.
Results and Dividend
During the year our revenue return on ordinary activities saw a loss of 1.9p per share, the same as in 2014. The benefits of our cost reduction are already being seen with our operating costs down by 5%, although our total expense ratio rose to 2.5%, compared to 2.2% in 2014, due to the reduction in net asset value. The ratio remains lower than most other VCTs due to the self-management structure of Hygea and the absolute level of day to day expenditure should reduce further in the light of changes following our review of the cost base.
The capital return per share amounted to a loss of 13.0p compared to a loss of 4.2p in 2014, primarily due to the reduction in bid prices on all of our AIM shares (of between 16% and 57%).
During the year we sold 1,000 shares in EpiStem Holdings plc and the remaining 13,000 Tristel plc shares. In addition we have supported Fuel 3D's recent fund raising.
Hygea has a policy of accruing for the Board's incentive fee arrangements in the accounts. This fee will only start to be paid out when distributions per share have, cumulatively, reached 80p, and, reflecting the decrease in NAV, this accrual has been reduced from £702,000 to £401,000 in this year's accounts.
Overall the total return for the year amounted to a loss of 14.9p per share, compared to a loss of 6.1p per share in 2014. As Scancell made up over 45% of the portfolio value at 31 December 2015, the loss of £1,391,000 in its share value makes up a significant part of the capital loss before the reduction in performance fee.
Subsequent to the year end, there has been continued volatility on AIM. Had our portfolio been valued at the latest AIM bid prices, the overall NAV would have been 69.2p, a decrease of 8% compared to the 31 December 2015 value of 75.5p.
In order to provide greater control over the timing of realising part of our AIM portfolio to cover running costs, we have increased our overdraft facility to £200,000.
Hygea's investments provide the Company with very little income, and thus distributions or cash returns to Shareholders will come from disposals. Historically, the Board had intended to pay out a dividend averaging 5p per year, but following discussions after the continuation vote last year, we have determined to return funds to our Shareholders as soon as practicable. However, we will be precluded in this aim until we are able to make a significant realisation and we do not believe that the current state of the AIM market is conducive to achieving this in the short term.
Portfolio Review
Although there has been no change in the constituents of the portfolio (apart from the disposal of our remaining holding in Tristel), many of the companies have made good operational progress during the year as described in Investment Review, starting on page 5 of the Accounts.
Subsequent to the year end, to cover running costs, we have sold 226,519 shares in EKF Diagnostics Plc ("EKF") and 137,900 shares in Omega Diagnostics. £20,048 of the funds raised have also been used to take up our share of rights in a recent Exosect fund raising.
UK Capital Markets
In addition to the recent well publicised events giving rise to uncertainty globally, the UK capital markets for smallcaps are also in some turmoil. In our view, this is contributed to by:
- reduced interest on the part of UK institutional investors in UK smallcaps. This is borne out by a report issued in October 2015 by Hardman & Co entitled 'Why AIM Company Management Ignore Retail Investors at their Peril', which can be found at www.hardmanandco.com/docs/default-source/newsletters/ons-article-v2;
- the eventual onset of MiFID 2 (the EU Directive on markets in financial instruments) is causing brokers to reconsider the economics of providing research; and
- there being a significant movement during 2015 of life science analysts from one employer to another, resulting in reduced research coverage whilst the changes are taking place. For example, a recently scheduled analyst meeting for one of Hygea's investees was cancelled because it proved impossible to assemble sufficient analysts.
As outlined above, the remaining institutional investors understandably focus on the larger AIM companies, leaving companies with market caps of under £50m much less well supported.
Against the background of the Board's stated objective of having as much as possible of the portfolio in AIM quoted stocks, the Board takes a keen interest in trying to understand why existing market mechanisms give rise to the huge share price volatility which AIM companies in the Hygea portfolio have experienced in recent months. In particular, there seems to be little correlation between the share price movement and what is happening within the companies commercially. We also monitor market developments which we consider will help to address the issues mentioned above, and are pursuing several approaches (both individually and in combination with our portfolio companies) in order to reduce the impact of these challenges. These developments are generally based on organising private investors by harnessing digital technology - a number of these developments are due to become operational during 2016 and we hope they will, in combination, result in the AIM market functioning more effectively for companies such as those within the Hygea portfolio. An example of this is the recent launch by Syndicate Room, (a crowdfunding platform) of a public market service for its investors and its participation in the recent Scancell fundraise.
Annual General Meeting
The Company's AGM will be held at 12.00 on 2 June 2016 at the 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.
Registrars
As part of the review of costs, we have decided to appoint Neville Registrars in place of Capita as our Registrars. Details of the new contact details are set out in the Accounts. At the same time, we are seeking to simplify and reduce the cost of communications with Shareholders, and this is in keeping with similar proposals by many other quoted companies, and you will have received a letter regarding this last month.
Annual reports, notices of shareholder meetings and other documents that are required to be sent to Shareholders are published on our website at www.hygeavct.com. For those Shareholders who have consented, the website will be one of the ways in which you access shareholder information.
Future prospects
Your Board would like to thank you for your support by approving the continuation vote at the last AGM. The recent Finance Act has made significant changes to the VCT regime largely due to the requirements of the EU for VCTs to comply with stringent and re-enforced State Aid regulations. We do not believe these will have any material effect on Hygea at this time. We remain conscious that Shareholders' main objective is to seek to expedite liquidity events within the portfolio following which we will consult with Shareholders on the way forward in the light of the new regulations.
Notwithstanding the current problems being faced by the AIM market, we continue to believe that our objective of having as much of the portfolio quoted on this market as possible is sound and allows us the flexibility of liquidating portions of our holdings when conditions permit. Against the global economic backdrop, there is huge pressure to deliver better patient outcomes more efficiently. This can only be achieved through harnessing innovation, and we believe that once our investees can articulate the economic benefit which their products can bring to customers, this will give them valuable pricing power. We continue to view our portfolio with confidence but recognise that our expected timetable of liquidity events has been extended and we are grateful to our Shareholders for their continued patience.
John Hustler
Chairman
8 April 2016
Investment Review
Investment Portfolio
| Unquoted Investments | Investment at cost (£'000) | Unrealised profit/(loss) (£'000) | Carrying value at 31 December 2015 (£'000) | Movement in the year to 31 December 2015 (£'000) |
| Hallmarq Veterinary Imaging Limited | 1,116 | 289 | 1,405 | 351 |
| OR Productivity plc | 765 | (101) | 664 | - |
| Fuel 3D Limited (formerly Eykona Technologies Limited) | 299 | 146 | 445 | - |
| Glide Pharmaceutical Technologies Limited | 326 | (7) | 319 | - |
| Arecor Limited | 127 | 16 | 143 | 11 |
| ImmunoBiology Limited | 868 | (742) | 126 | - |
| Insense Limited | 509 | (421) | 88 | - |
| Miccroarray Limited | 132 | (65) | 67 | - |
| Exosect Limited | 250 | (188) | 62 | (62) |
| Axon Limited | 374 | (374) | - | - |
| Wound Solutions Limited | 350 | (350) | - | - |
| Total unquoted investments | 5,116 | (1,797) | 3,319 | 300 |
| Quoted Investments | ||||
| Scancell plc | 801 | 2,047 | 2,849 | (1,391) |
| Omega Diagnostics plc | 348 | 29 | 377 | (70) |
| EKF Diagnostics plc | 260 | (118) | 141 | (132) |
| EpiStem Holdings plc | 43 | (3) | 39 | (51) |
| Reneuron plc | 50 | (23) | 28 | (11) |
| Total quoted investments | 1,502 | 1,932 | 3,434 | (1,655) |
| Total investments | 6,618 | 135 | 6,753 | (1,355) |
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. The first product in clinical trials is SCIB1 - there are early indications that it 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).
Update since 2014: Scancell recognized that in order to develop, it needed a strong US orientation clinically in order to access US capital markets - the latter are required because they have deeper experience of and appetite for investing in companies such as Scancell than the UK capital markets. Against this background, key achievements have been:
- the January 2016 update re the SCIB1 Phase I/II clinical trial reported that all 16 patients on 2-4mg doses with fully resected disease are still alive, representing a median survival time of 42 months, with 11 remaining disease free - median observation time in 4 resected patients who received 8mg is 10 months, with all patients remaining disease free;
- a team of investigators from leading US oncology hospitals has been formed to lead a Phase I checkpoint inhibitor combination study with SCIB1. This is due to start in early 2017;
- in October 2015 an NED was appointed, bringing significant international experience particularly in the US life science sector. In 2016 he became chairman of Scancell, which he knew from his time as CEO of Arana which acquired Scancell's antibody business in 2006. In addition a highly experienced pre-clinical and clinical development consultant to the pharmaceutical industry was appointed as advisor - he had most recently served as VP & Global Head of Oncology at Teva Pharmaceuticals, and;
- the company raised £6.2m gross proceeds through a placing and open offer in April 2016. This capital raising will allow Scancell to prepare for further clinical studies on both SCIB1 and Moditope.
| Initial investment date: | December 2003 |
| Cost: | £801,000 |
| Valuation: | £2,849,000 |
| Equity held: | 5.9% |
| Last audited accounts: | 30 April 2015 |
| Turnover: | £nil |
| Loss before tax: | £2.8 million |
| Net assets: | £6.8 million |
| Valuation method: | Bid price |
Hallmarq Veterinary Imaging Limited
Background: Hallmarq specialises in developing low cost magnetic resonance (MRI) 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 2014.
Update since 2014: The results to August 2015 showed sales of £5.4 million (2014: £4.3 million), EBITDA of £2.0million (2014: £1.6 million) and pre-tax profit of £1.0 million (2014: £0.8 million), with recurring income growing from £3.8 million to £4.3 million. Key events include:
- the appointment of a chairman with appropriate experience for assisting the company achieve the next stage of growth.
- commissioning of the second PetVet, with the third about to be commissioned.
- passing the milestone of scanning 60,000 horses since inception.
| Initial investment date: | 31 August 2005 |
| Cost: | £1,116,000 |
| Valuation: | £1,405,000 |
| Equity held: | 10.2% |
| Last audited accounts: | 31 August 2015 |
| Turnover: | £5.4 million |
| Profit before tax: | £1.0 million |
| Net assets: | £7.2 million |
| Valuation method: | Earnings multiple |
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, a sector predicted to grow at 9% pa. 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 image is not steady - the Freehand product still appears to be regarded as the leading solution worldwide for enabling HD and 3D camera systems for keyhole surgery to provide a rock steady image.
Update since 2014: In Q1 2015 a milestone was achieved inasmuch as UK sales contributed gross profit which matched UK marginal overheads. Since then the much publicised challenges within the NHS have impeded ORP's progress in the UK. However, senior personnel within certain NHS Trusts are starting to recognise that procurement needs to focus on efficiency rather than just price and that innovation is key to driving efficiency. ORP is making good progress at a senior level within several such trusts which is expected to benefit 2016 following a very difficult 2015. These relationships are also expected to benefit ORP's strategy of introducing in due course other Minimally Invasive Medicine technologies alongside Freehand.
| Initial investment date: | March 2011 |
| Cost: | £765,000 |
| Valuation: | £664,000 |
| Equity held: | 13.8% |
| Last audited accounts: | 31 March 2015 |
| Turnover: | £301,000 |
| Loss before tax: | £963,000 |
| Net assets: | £774,000 |
| Valuation method: | Price of last fundraise |
Omega Diagnostics plc
Background: Omega Diagnostics plc ("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 and 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 by Omega 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 2014: both of the transformational projects are progressing and the IDS-iSYS project is expected to achieve CE marking by mid 2016. The interim results to September 2015 showed sales of £6.15 million (2014: £5.7 million) and adjusted pre-tax profit of £351,000 (2014: £410,000), after increasing overheads by £279,000 in order to implement growth plans.
| Initial investment date: | August 2007 |
| Cost: | £348,000 |
| Valuation: | £377,000 |
| Equity held: | 2.4% |
| Last audited accounts: | 31 March 2015 |
| Turnover: | £12.1 million |
| Profit before tax: | £684,000 |
| Net assets: | £18.8 million |
| Valuation method: | Bid price |
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 in cash (with Hygea subscribing £49,000) and also acquired Eykona's IP in exchange for Eykona Shareholders receiving Preferred Shares in Fuel 3D.
Update since 2014: Following the launch of the 3D scanner for the consumer market, the company has received approaches from businesses, particularly those providing personalised solutions to consumers - an example is orthotics where using the scanner can automate the process of making shoes inexpensively for people whose feet are different in size and/or shape. The business model being pursued in the B2B market is expected to generate recurring income. The company raised further funds in 2015.
| Initial investment date: | March 2010 |
| Cost: | £299,000 |
| Valuation: | £445,000 |
| Equity held: | < 1% |
| Last audited accounts: | 31 December 2014 |
| Turnover: | £603,000 |
| Loss before tax: | £1.3 million |
| Net assets: | £5.6 million |
| Valuation method: | Price of last fundraise |
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 by removing the need (and cost) for refrigerated storage.
Update since 2014: the key focus has been on preparing for a 22 patient trial using Glide's injector with Octreotide - the results are expected in July 2016. There is a strong prospect pipeline in the vaccine and peptide markets to be progressed if the results of the trial prove successful. Glide is targeting to become a specialty pharma business based on using its delivery system as the platform.
| Initial investment date: | November 2005 |
| Cost: | £326,000 |
| Valuation: | £319,000 |
| Equity held: | 1.2% |
| Last audited accounts: | 31 December 2014 |
| Turnover: | £254,000 |
| Loss before tax: | £3.2 million |
| Net assets: | £8.5 million |
| Valuation method: | Price of last fundraise |
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 2014: the company is transitioning from a research based enterprise into a sustainable commercial organization focused in the areas of diabetes, peptides, high concentration proteins and biosimilars. This process has been assisted by the appointment of a new CEO in May 2015, since when the business has developed from reliance on one major client to having three such clients with multiproduct relationships, and discussions are under way with two additional multiproduct companies - this positioning is intended to increase the probability of generating licenses.
| Initial investment date: | January 2008 |
| Cost: | £127,000 |
| Valuation: | £143,000 |
| Equity held: | 2.1% |
| Last audited accounts: | 31 May 2015 |
| Turnover: | £777,000 |
| Lossbefore tax: | £705,000 |
| Net assets: | £31,000 |
| Valuation method: | Price of last fundraise |
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 June 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. In 2014 two acquisitions were made for a combined initial consideration of some £40 million with the objective of enabling EKF to participate meaningfully within the field of personalised medicine.
Update since 2014: the molecular diagnostics acquisitions made in 2014 significantly underperformed against expectations, principally due to changes to reimbursement in the US. This has resulted in i) Ron Zwanziger becoming chairman - he was the founding CEO of Alere (see above) which was acquired in early 2016 for $5.8 bn by Abbott, and ii) exiting molecular diagnostics activities to concentrate on Point of Care diagnostics. The restructuring is considered by the new chairman to provide considerable prospects for future growth.
| Initial investment date: | June 2010 |
| Cost: | £260,000 |
| Valuation: | £141,000 |
| Equity held: | <1% |
| Last audited accounts: | 31 December 2014 |
| Turnover: | £40.1 million |
| Loss before tax: | £4.0 million |
| Net assets: | £87.4 million |
| Valuation method: | Bid price |
ImmunoBiology Limited
Background: ImmunoBiology is a biotechnology company that is focused on developing treatments for illnesses 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 2014: 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. In December 2015 a first in human study started, with results anticipated in Q2 2016 - subject to the results, it is intended to find partners to progress late stage development, manufacturing and marketing.
| Initial investment date: | November 2005 |
| Cost: | £868,000 |
| Valuation: | £126,000 |
| Equity held: | 3% |
| Last audited accounts: | 31 May 2015 |
| Turnover: | £nil |
| Loss before tax: | £1.7 million |
| Net assets: | £974,000 |
| Valuation method: | Price of last fundraise |
Insense Limited
Background: Insense was spun-out from Unilever's R&D laboratory in Bedfordshire, with the purpose of developing new wound healing products that are based on the oxygenation of the wound through the action of its patented Oxyzyme technology. It has since had two spin-outs, namely Arecor (see above) and Microarray, leaving it developing a fungal nail treatment.
Update since 2014: The fungal nail treatment is being developed as a pharmaceutical product, with the current focus on preparing to undertake a trial on humans.
| Initial investment date: | July 2003 |
| Cost: | £509,000 |
| Valuation: | £88,000 |
| Equity held: | 8.1% |
| Last audited accounts: | 31 December 2014 |
| Turnover: | £54,000 |
| Loss before tax: | £259,000 |
| Net liabilities: | £82,000 |
| Valuation method: | Cost less provision |
Directors' Report
The Directors present their report and the audited financial statements for the year ended 31 December 2015.
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 performance, business model and strategy.
Review of Business Activities
The Directors are required by s417 of the Companies Act 2006 to include a Business Review to Shareholders. This is set out in the Accounts and forms part of the Strategic Report. The Chairman's Statement on pages 2 to 4 of the Accounts, and the Investment Review on pages 5 to 11 of the Accounts also form part of this Strategic Report.
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.
Subsequent to the year end, to cover running costs, we have sold 226,519 shares in EKF and 137,900 shares in Omega Diagnostics in addition to the 1,000 Epistem shares sold during the year. £20,048 of the funds raised have also been used to take up our share of rights in a recent Exosect fund raising.
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 2015 | 31 December 2014 | |
| Number of Shares | Number of Shares | |
| John Hustler | 190,000 | 190,000 |
| Charles Breese | 105,000 | 105,000 |
| Richard Roth (appointed 7 October 2015) | 159,612 | n/a |
| James Otter (resigned 7 October 2015) | n/a | 24,050 |
Richard Roth held 159,612 shares on appointment as a Director of the Company on 7 October 2015. James Otter held 24,050 shares on 7 October 2015 when he resigned as a Director of the Company.
All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2015 and the date of this report.
Brief biographical notes on the Directors are given in the Accounts.
Directors' and Officers' Liability Insurance
The Company has maintained directors' and officers' liability insurance cover on behalf of the Directors and Company Secretary.
Whistleblowing
The Board has approved a Whistleblowing Policy for the Company, its directors and any employees, consultants and contractors, to allow them to raise concerns, in confidence, in relation to possible improprieties in matters of financial reporting and other matters.
Bribery Act
The Board has approved an Anti-Bribery Policy to ensure full compliance with the Bribery Act 2010 and to ensure that the highest standards of professional and ethical conduct are maintained.
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 on pages 16 and 17 of the Accounts.
Share Issues and Open Offers
During the year, the Company did not issue any shares (2014 - nil shares).
Share Capital
The Company's issued ordinary share capital as at 31 December 2015 is 8,115,376 ordinary shares of 50p each.
Directors
Biographical details of the Directors are shown in the Accounts. Richard Roth was appointed as a Director of the Company on 7 October 2015. James Otter resigned as Chairman on 14 July 2015 and as a Director of the Company on 7 October 2015.
In accordance with the provisions of the AIC Corporate Governance Guide for Investment Companies all of the Directors will retire at the forthcoming AGM as follows:
- Richard Roth having been appointed during the year and offers himself for re-election.
- Charles Breese and John Hustler having served as Directors for more than nine years. Each offer themselves for re-election.
The Board is satisfied that, following individual performance appraisals, the Directors retiring by rotation continue to be effective and to demonstrate commitment to the role and therefore offer themselves for re-election with the support of the Board.
The Board is cognisant of shareholders' preference for Directors not to sit on the boards of too many larger companies ("overboarding"). As part of their assessment as to his suitability, the Directors considered Richard Roth's other directorships at the time of his appointment, given that he also sits on the boards of the four Oxford Technology ("OT") VCTs. The directors noted that those four funds have a common board, and there is an element of overlap in the workload across the four entities, such that the time required is less than would be necessary for four totally separate and larger companies. They also note that Hygea has a number of shared portfolio companies with the OT VCTs. The Board is therefore satisfied that Richard Roth has the time to focus on the requirements of the Company.
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. The Company has adopted Financial Reporting Standard 102 - The Financial Reporting Standard Applicable in the United Kingdom and Republic of Ireland during the year.
Environmental Policy
The Company always a makes full effort to conduct its business in a manner that is responsible to the environment.
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 on pages 2 to 4 and pages 5 to 11 of the Accounts. Further details on the management of financial risk may be found in note 15 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 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 2015, two disclosures 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 a shareholding of 3.10% (251,500 shares), and on 2 June 2015, a further increase in shareholding to 5.44% (441,500 shares). On 15 July 2015 David Blundell disclosed an increase in shareholding to 3.09% (251,000 shares). No other changes have been notified since that date.
Annual General Meeting
Notice convening the 2016 Annual General Meeting of the Company and a form of proxy in relation to the meeting are enclosed separately. Part of the business of the AGM will be to consider resolutions in relation to the following matters:
- 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 9 renews the Directors' authority to allot Ordinary shares. This would enable the Directors until the next AGM, to allot up to 811,537 ordinary shares (representing approximately 10% of the Company's issued share capital as at 8 April 2016).
Resolution 10 renews the Directors' authority to allot equity securities for cash without pre-emption rights applying in certain circumstances. This Resolution would authorise the Directors, to issue Ordinary shares for cash without pre-emption rights applying up to a maximum of 811,537 Ordinary shares (representing approximately 10% of the Company's issued share capital as at 8 April 2016).
The Directors have no current intention to utilise the authority under Resolution 9 and 10.
By Order of the Board
Craig Hunter
Company Secretary
8 April 2016
Directors' Remuneration Report and Policy
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 2015. Resolutions to approve the Directors' Remuneration Report and the statement of Directors' Remuneration Policy will be proposed at the Annual General Meeting on 2 June 2016.
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 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 appointed Richard Roth to advise, inter alia, on Directors' remuneration, including the Performance Incentive Fee, during the year. The results of this review are explained below.
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 a period of at least 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. Directors who have served for more than nine years are subject to annual re-election in line with practices recommended in the AIC Corporate Governance Code. 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 accruing at the date of resignation up to five years from the date of resignation.
Following the review of the cost base of the Company, and in view of the current investment status of the Company's portfolio, the Board decided to reduce the annual Directors' fees with effect from 1 July 2015 and the Chairman will no longer be paid a higher fee than other Non-executive Directors. With effect from 1 July 2015, the fee for each Director was set at £12,000 per annum.
The Board has also been entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them whilst conducting their duties as Directors. However, from 1 January 2016, the Directors' fees have been increased to £12,750 per annum inclusive of all expenses to simplify administration.
In addition to the reduction in the Directors' fees by just over one third, the terms of the performance incentive fee have been revised under an agreement dated 7 October 2015. These revised arrangements are subject to approval at the Company's 2016 AGM as part of the Company's Remuneration Policy. The new arrangements have frozen the sum due to those Directors serving up to 7 October 2015 at £702,000 (the accrued liability as disclosed in the 2014 audited accounts) which will only start to become payable once Shareholders have received 80p in dividends. This liability will then be paid at the rate of 25% of subsequent dividends until a liability of £702,000 has been discharged; this is in keeping with the original approved arrangement. Following the payment of this liability, any further performance fee in the future will be payable at the reduced rate of 10% of total distributions above the audited total return at 31 December 2014, with the outstanding balance subject to a hurdle rate of 6% per annum, and will be split between the CAC based on a formula driven by relative length of service starting from 7 October 2015. Further details of the revised arrangements are set out in Note 5 to the accounts.
Company Performance
The Board is responsible for the Company's investment strategy and performance. The performance graph in the 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 2015 | 31 December 2014 | |
| £ | £ | |
| John Hustler (Chairman)* | 14,750 | 17,500 |
| Charles Breese | 14,750 | 17,500 |
| Richard Roth** | 2,769 | - |
| James Otter * and ** | 16,231 | 20,000 |
| Total | 48,500 | 55,000 |
* On 14 July 2015 James Otter resigned as Chairman of the Board and John Hustler was appointed as Chairman.
** On 7 October 2015 James Otter resigned as a Director and Richard Roth was appointed as a Non-executive Director.
As referred to above, Richard Roth was appointed as a Consultant from 1 July 2015 until he joined the Board. He was paid £2,500 in respect of these services.
The Directors did not receive any other form of emoluments in addition to the directors' fees during the year. The current Directors, as members of the CAC, may be entitled to performance fees in the future as referred to above. Directors may be entitled to fees from investee companies when acting on the Company's behalf as Director, Observer or Consultant to those investees.
By order of the Board
Craig Hunter
Company Secretary
8 April 2016
Income Statement | ||||||||
| Year to 31 December 2015 | Year to 31 December 2014 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Gain on disposal of fixed asset investments | - | 3 | 3 | - | 60 | 60 | ||
| Loss on valuation of fixed asset investments | 9 | - | (1,355) | (1,355) | - | (527) | (527) | |
| Performance fee | 5 | - | 301 | 301 | - | 123 | 123 | |
| Income | 2 | - | - | - | 12 | - | 12 | |
| Other expenses | 3 | (154) | - | (154) | (163) | - | (163) | |
| Return on ordinary activities before tax | (154) | (1,051) | (1,205) | (151) | (344) | (495) | ||
| Taxation on return on ordinary activities | 6 | - | - | - | - | - | - | |
| Return on ordinary activities after tax | (154) | (1,051) | (1,205) | (151) | (344) | (495) | ||
| Return on ordinary activities after tax attributable to: | ||||||||
| Owners of the fund | (154) | (1,051) | (1,205) | (151) | (344) | (495) | ||
| Earnings per share - basic and diluted | 7 | (1.9)p | (13.0)p | (14.9)p | (1.9)p | (4.2)p | (6.1p) | |
8 April 2016
There was no other Comprehensive Income recognised during the year
- The 'Total' column of the income statement and statement of comprehensive income 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.
Statement of Changes in Equity
| Share Capital | Special distributable reserve | Capital redemption reserve | Capital reserve gains/ (losses) | Capital reserve holding gains/ (losses) | Revenue reserve | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 1 January 2014 | 4,058 | 3,397 | 38 | (315) | 1,989 | (1,338) | 7,829 |
| Revenue return on ordinary activities after tax | - | - | - | - | - | (151) | (151) |
| Performance fee allocated as capital expenditure | - | - | - | 123 | - | - | 123 |
| Current period gains on disposal | - | - | - | 60 | - | - | 60 |
| Current period losses on fair value of investments | - | - | - | - | (527) | - | (527) |
| Prior years' unrealised losses now realised | - | - | - | (33) | 33 | - | - |
| Balance as at 31 December 2014 | 4,058 | 3,397 | 38 | (165) | 1,495 | (1,489) | 7,334 |
| - | |||||||
| Revenue return on ordinary activities after tax | - | - | - | (154) | (154) | ||
| Performance fee allocated as capital expenditure | - | - | - | 301 | - | - | 301 |
| Current period gains on disposal | - | - | - | 3 | - | - | 3 |
| Current period losses on fair value of investments | - | - | - | - | (1,355) | - | (1,355) |
| Prior years' unrealised gains now realised | - | - | - | 5 | (5) | - | - |
| Balance as at 31 December 2015 | 4,058 | 3,397 | 38 | 144 | 135 | (1,643) | 6,129 |
Refer to note 13 for movement in Shareholders' funds.
The accompanying notes are an integral part of the financial statements.
| Balance Sheet | |||||
| As at 31 December 2015 | As at 31 December 2014 | ||||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| Fixed asset investments* | 9 | 6,753 | 8,072 | ||
| Current assets: | |||||
| Debtors | 10 | 6 | 8 | ||
| Cash at bank | (169) | 16 | |||
| Creditors: amounts falling due within one year | 11 | (60) | (60) | ||
| Net current assets | (223) | (36) | |||
| Creditors: amounts falling due more than one year | 11 | (401) | (702) | ||
| Net assets | 6,129 | 7,334 | |||
| 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 | 144 | (165) | ||
| - holding gains and losses | 13 | 135 | 1,495 | ||
| Revenue reserve | 13 | (1,643) | (1,489) | ||
| Total equity Shareholders' funds | 6,129 | 7,334 | |||
| Net asset value per share | 8 | 75.5p | 90.4p | ||
*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 8 April 2016 and are signed on their behalf by:
John Hustler
Chairman
Company No: 04221489
Statement of Cash Flows
| Notes | Year to 31 December 2015 £'000 | Year to 31 December 2014 £'000 | ||||
| Cash flows from operating activities | ||||||
| Return on ordinary activities before tax | (1,205) | (495) | ||||
| Adjustments for: | ||||||
| Decrease in debtors | 10 | 2 | 67 | |||
| Decrease in creditors | 11 | (301) | (117) | |||
| Gain on disposal of fixed assets | 9 | (3) | (60) | |||
| Loss on valuation of fixed asset investments | 9 | 1,355 | 527 | |||
| Cash from operations | (152) | (78) | ||||
| Income taxes paid | 6 | - | - | |||
| Net cash generated from operating activities | (152) | (78) | ||||
| Cash flows from investing activities | ||||||
| Purchase of fixed asset investments | 9 | (49) | (70) | |||
| Sale of fixed asset investments | 9 | 16 | 134 | |||
| Total cash flows from investing activities | (33) | 64 | ||||
| Cash flows from financing activities | ||||||
| Total cash flows from financing activities | - | - | ||||
| Decrease in cash and cash equivalents | (185) | (14) | ||||
| Opening cash and cash equivalents | 16 | 30 | ||||
| Closing cash and cash equivalents | (169) | 16 | ||||
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements
This is the first year in which the financial statements have been prepared under Financial Reporting Standard 102 - 'The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland' ('FRS 102'). The Company has adopted FRS 102 for the year ended 31 December 2015. The main changes are primarily presentational - to the fixed asset investments' fair value hierarchy, and the primary statements and associated reconciliations. The accounting policies have not materially changed from last year.
A review of any required changes to comparative figures has taken place and it has been deemed that no such restatements are necessary.
- Principal Accounting Policies
Basis of preparation
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 ("GAAP"), including FRS 102 and with the Companies Act 2006 and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies and Venture Capital Trusts (revised 2014)'.
The principal accounting policies have remained materially unchanged from those set out in the Company's 2014 Annual Report and financial statements. There have been no changes to the measurement of the assets and liabilities as a result of the transition to FRS 102. A summary of the principal accounting policies is set out below.
FRS 102 sections 11 and 12 have been adopted with regard to the Company's financial instruments. The Company held all fixed asset investments at fair value through profit or loss. Accordingly, all interest income, fee income, expenses and gains and losses on investments are attributable to assets held at fair value through profit or loss.
The most important policies affecting the Company's financial position are those related to investment valuation and require 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. These are discussed in more detail below.
Going Concern
After reviewing the Company's forecasts and expectations, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The Company therefore continues to adopt the going concern basis in preparing its financial statements.
Key judgements and estimates
The preparation of the financial statements requires the Board to make judgements and estimates regarding the application of policies and affecting the 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.
Investments are regularly reviewed to ensure that the fair values are appropriately stated. Unquoted investments are valued in accordance with current IPEVC valuation guidelines, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of investee companies and liquidity or marketability of the investments held.
Although the Directors believe that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could result in changes in the stated values. This could lead to additional changes in fair value in the future.
Functional and presentational currency
The financial statements are presented in Sterling (£). The functional currency is also Sterling (£).
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts.
Fixed asset investments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out below.
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 and information about them is provided internally on that basis to the Board. Accordingly, as permitted by FRS 102, the investments are measured as being fair value through profit or loss 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. In the case of AIM quoted investments this is the closing bid price. In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple, discounted cash flows and net assets. These are consistent with the International Private Equity and Venture Capital (IPEVC) guidelines which can be found on their website at www.privateequityvaluation.com.
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.
Fair value hierarchy
Paragraph 34.22 of FRS 102 regarding financial instruments that are measured in the balance sheet at fair value requires disclosure of fair value measurements dependent on whether the stock is quoted and the level of the accuracy in the ability to determine its fair value. The fair value measurement hierarchy is as follows:
For quoted investments:
Level a: quoted prices in active markets for an identical asset. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the bid price at the Balance Sheet date.
Level b: where quoted prices are not available (or where a stock is normally quoted on a recognised stock exchange that no quoted price is available), the price of a recent transaction for an identical asset, providing there has been no significant change in economic circumstances or a significant lapse in time since the transaction took place. The Company holds no such investments in the current or prior year.
For investments not quoted in an active market:
Level c: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data (eg the price of recent transactions, earnings multiple, discounted cash flows and/or net assets) where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level c (i). If one or more of the significant inputs is not based on observable market data, the instrument is included in level c (ii). The split of the investment categories is shown in note 9.
There have been no transfers between these classifications in the year (2014: none). The change in fair value for the current and previous year is recognised through the profit and loss account.
Current asset investments
No current asset investments were held at 31 December 2015 or 31 December 2014. 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, and dividends. Fixed returns on debt are recognised on a time apportionment basis so as to reflect the effective yield, provided it is probable 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 realised or unrealised at the balance sheet date.
Taxation
Current tax is recognised for the amount of income tax payable in respect of the taxable profit for the current or past reporting periods using the current tax 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, except as otherwise indicated.
Deferred tax assets are only recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.
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 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.
Reserves
Called up equity share capital - represents the nominal value of shares that have been issued.
Share premium account - includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium.
Special distributable reserve - includes cancelled share premium available for distribution.
Capital reserve - holding gains & losses - arises when the Company revalues the investments still held during the period with any gains or losses arising being credited/ charged to the Capital reserve - holding gains & losses.
Capital reserve - gains and losses on disposal - arises when an investment is sold any balance held on the Capital reserve - holding gains and losses is transferred to the Capital reserve - gains and losses on disposal, as a movement in reserves.
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.
- Income
| Year to 31 December 2015 | Year to 31 December 2014 | |
| £'000 | £'000 | |
| Dividends received | - | 2 |
| Loan note interest receivable | - | 10 |
| - | 12 |
- Other Expenses
| Year to 31 December 2015 | Year to 31 December 2014 | |
| £'000 | £'000 | |
| Directors' remuneration | 49 | 55 |
| Fees payable to the Company's auditor for the audit of the financial statements | 9 | 8 |
| Fees payable to the Company's auditor for other services - tax compliance | 1 | 1 |
| Legal and professional expenses | 55 | 57 |
| Accounting and administration services | 30 | 35 |
| Other expenses | 10 | 7 |
| 154 | 163 |
For the year ended 31 December 2015 the running costs were 2.5% (2014: 2.2%) of net assets.
- Directors' Remuneration
| Year to 31 December 2015 | Year to 31 December 2014 | |
| £ | £ | |
| Directors' emoluments | ||
| John Hustler (Chairman)* | 14,750 | 17,500 |
| Charles Breese | 14,750 | 17,500 |
| Richard Roth** | 2,769 | - |
| James Otter * and ** | 16,231 | 20,000 |
| 48,500 | 55,000 |
* On 15 July 2015 James Otter retired as Chairman of the Board and John Hustler was appointed as Chairman.
** On 7 October 2015 James Otter resigned as a Director and Richard Roth was appointed as a Director.
None of the Directors received any other remuneration from the Company during the year. The Directors may become entitled to receive a share of the Performance Incentive Fee as detailed in the Directors' Remuneration Report on Page 16 of the Accounts and in note 5. The Company has no employees other than non-executive Directors. The average number of non-executive Directors in the year was three (2014: three).
- Performance fees
The Commercial Advisory Committee took over management of the Company's investments on 30 July 2007, and at that time, a revised Performance Incentive Scheme was implemented, such that its members would be entitled to 20% of all cash returns above the initial net cost to subscribing shareholders of 80p.
On 7 October 2015, this scheme was varied such that any returns above the 31 December 2014 levels would be subject to a hurdle, and the share to the CAC reduced from 20% to 10%. The hurdle is a compound 6% per annum on any amounts below the latest hurdle still due to be paid to shareholders (i.e. in recognition of dividends paid, actual returns to shareholders will be subtracted from the compounding threshold in the year these are paid).
The Total Gross Return at 31 December 2014 on which the performance fee liability of £702,000 was calculated was 123.3p, resulting in the quoted net asset value of 114.6p. For the purposes of this note 5, Total Gross Return is defined as the total return made by the fund, before the deduction of any dividend payments or accruals and/or payments made relating to any potential (or actual) performance incentive fee.
Any dividends paid above 80p will be split 80% to shareholders and 20% to the members of the CAC as at 31 December 2014, until shareholders have received dividends totalling 114.6p.
A performance fee may be payable on any further dividends above this level, but only if the hurdle applicable at that time has been met.
As at 31 December 2015, the Total Gross Return is 104.7p, and so 4.94p per share totalling £401,000 has been accrued (31 December 2014 123.3, 8.7p and £702,000).
Assuming no dividends are paid during the year, the Total Gross Return would need to exceed 134.4p at 31 December 2016 before any fee above £702,000 could be due, and at that time, it would be 10% of any cash payments made above this threshold. If such a performance fee is not triggered (as it has not been in this financial year) the hurdle, net of dividends paid, increments by a compound annual growth rate of 6%, applied quarterly.
- Tax on Ordinary Activities
The corporation tax charge for the period was £nil (2014: £nil).
The current rate of tax is the small companies' rate of corporation tax at 20.0% (2014: 20.0%)
| Current tax reconciliation: | Year to 31 December 2015 | Year to 31 December 2014 |
| £'000 | £'000 | |
| Return on ordinary activities before tax | (154) | (151) |
| Current tax at 20.0% (2014: 20.0%) | (31) | (30) |
| Unrecognised tax losses | 31 | 30 |
| Total current tax charge and tax on results of ordinary activities | - | - |
The company has excess management charges of £2,610,885 (2014: £2,757,976) to carry forward to offset against future taxable profits.
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.
- Earnings per Share
The earnings per share is based on 8,115,376 (31 December 2014: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a return for the year totalling (£1,205,000) (31 December 2014: (£495,000)).
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.
- Net Asset Value per Share
The calculation of NAV per share as at 31 December 2015 is based on 8,115,376 ordinary shares in issue at that date (31 December 2014: 8,115,376).
- Fixed Asset Investments
| Level a: AIM-quoted investments | Level c (ii): Unquoted investments | Total investments | ||
| £'000 | £'000 | £'000 | ||
| Valuation and net book amount: | ||||
| Book cost as at 1 January 2015 | 1,510 | 5,067 | 6,577 | |
| Cumulative revaluation | 3,592 | (2,097) | 1,495 | |
| Valuation at 1 January 2015 | 5,102 | 2,970 | 8,072 | |
| Movement in the year: | ||||
| Purchases at cost | - | 49 | 49 | |
| Disposal proceeds | (13) | (3) | (16) | |
| Gain/(loss) on disposal | - | 3 | 3 | |
| Revaluation in year | (1,655) | 300 | (1,355) | |
| Valuation at 31 December 2015 | 3,434 | 3,319 | 6,753 | |
| Book cost at 31 December 2015 | 1,502 | 5,116 | 6,618 | |
| Revaluation to 31 December 2015 | 1,932 | (1,797) | 135 | |
| Valuation at 31 December 2015 | 3,434 | 3,319 | 6,753 |
Further details of the fixed asset investments held by the Company are shown within the Investment Review on pages 5 to 11 of the Accounts.
All investments are initially measured as fair value through profit or loss, and all capital gains or losses on investments are so measured. The changes in fair value of such investments recognised in these financial statements are treated as unrealised holding gains or losses.
- Debtors
| 31 December 2015 | 31 December 2014 | |
| £'000 | £'000 | |
| Prepayments and accrued income | 6 | 8 |
| 6 | 8 |
- Creditors
| 31 December 2015 | 31 December 2014 | |
| £'000 | £'000 | |
| Amounts falling due within one year | ||
| Accruals | 24 | 24 |
| Trade creditors | 7 | 7 |
| Other creditors | 29 | 29 |
| Total amounts falling due within one year | 60 | 60 |
| Amounts falling due after one year | ||
| Accruals | 401 | 702 |
| Total amounts falling due after one year | 401 | 702 |
The amount falling due after more than one year relates to the potential liability for a performance fee. More details are in Note 5.
- Share Capital
| 31 December 2015 | 31 December 2014 | |
| £'000 | £'000 | |
| Allotted and fully paid up: | ||
| 8,115,376 Ordinary shares of 50p (2014: 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 in the Accounts.
During the year, the Company did not issue, nor buy back, any shares.
- Movement in Shareholders' Funds
| Year ended 31 December 2015 | Year ended 31 December 2014 | ||
| £'000 | £'000 | ||
| Shareholders' funds at start of year | 7,334 | 7,829 | |
| Return on ordinary activities after tax | (1,205) | (495) | |
| Shareholders' funds at end of year | 6,129 | 7,334 | |
The analysis of changes in equity by the various reserves are shown on Page 19.
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 reduced by negative holding reserves (if any) which total £1,898,000 as at 31 December 2015 (2014: £1,743,000).
- Financial Instruments
The Company's financial instruments comprise equity and loan note investments, cash balances and liquid resources including debtors and creditors.
Classification of financial instruments
The Company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 December 2015 and 31 December 2014:
| 31 December 2015 | 31 December 2014 | |
| £'000 | £'000 | |
| Financial assets at fair value through profit or loss | ||
| Fixed asset investments | 6,753 | 8,072 |
| Total | 6,753 | 8,072 |
| Financial assets measured at amortised cost | ||
| Cash at bank | (169) | 16 |
| Debtors | 6 | 8 |
| Total | (163) | 24 |
| Financial liabilities measured at amortised cost | ||
| Creditors | (461) | (762) |
| Total | (461) | (762) |
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.
The Company's creditors and debtors are recognised at fair value which is usually the transaction cost or net realisable value if lower.
Hygea has an overdraft facility of £200,000 with the Royal Bank of Scotland. There is a debenture security held over this overdraft.
- Financial Risk Management
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 market 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 outlined in the Accounts. The management of market risk is part of the investment management process. 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 in the medium term. 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 out on page 5 of the Accounts.
54.2% (2014: 40.5%) by value of the Company's gross assets comprise 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 2015 would have increased net assets and the total return for the year by £331,900 (2014: £297,000) disregarding the impact of the performance fee; an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount.
56.0% (2014: 69.9%) by value of the Company's gross net assets comprises equity securities quoted on AIM. A 10% increase in the bid price of these securities as at 31 December 2015 would have increased net assets and the total return for the year by £343,000 (2014: £510,000) disregarding the impact of the performance fee; 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 2015 or 31 December 2014.
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 2015 the Company's financial assets exposed to credit risk comprised the following:
| 31 December 2015 £000 | 31 December 2014 £000 | |
| Cash at bank | (169) | 16 |
| (169) | 16 |
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 are 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.
- Events After the Balance Sheet Date
As referenced in the Chairman's statement, in March 2016, we invested £20,048 in Exosect, and sold 226,519 shares in EKF for £25,000 and 137,900 shares in Omega Diagnostic for £20,000.
- Contingencies, Guarantees and Financial Commitments
There were no contingencies, guarantees or financial commitments as at 31 December 2015 (2014: £nil).
- 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 as detailed in Note 5.
James Otter was an Observer on the board of Hallmarq for which he received a fee from Hallmarq during the year of £5,500 (2014: £6,000).
Charles Breese is a director of OR Productivity and received £nil from OR Productivity in fees for his support during the year (£2014: £10,000).
Richard Roth was appointed as a Consultant from 1 July 2015 until he joined the Board. He was paid £2,500 in respect of these services.
Note to the announcement:
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 2015, income statement and cash flow statement for the period then ended have been extracted from the Company's 2015 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 2015 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: http://www.mornningstar.co.uk/uk/NNSM
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 2 June 2016 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 2015 be received and adopted.
- That the Directors' Remuneration Report in respect of the year ended 31 December 2015 be received and adopted.
- That the Directors' Remuneration Policy contained in the Directors' Remuneration Report for the year ended 31 December 2015 be approved.
- That Charles Breese be re-elected as a Director of the Company.
- That John Hustler be re-elected as a Director of the Company.
- That Richard Roth 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.
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 9 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.
Notice of Annual General Meeting (continued)
| 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, Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, B63 3DA 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.
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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