Annual Financial Report

RNS Number : 9617X

Downing Strategic Micro-Cap IT PLC

03 May 2019

Downing Strategic Micro-Cap Investment Trust PLC

Final Results for the year to 28 February 2019

Company number: 10626295

Downing Strategic Micro-Cap Investment Trust PLC

(the "Company")

The investment objective of the Company is to generate capital growth for shareholders over the long term, from a focused portfolio of UK micro-cap companies (those whose market capitalisations are under £150 million at the time of investment) targeting a compound return of 15% per annum over the long term

The Directors of Downing Strategic Micro-Cap Investment Trust PLC announce the Company's results for the year ended 28 February 2019.

The key points are as follows:

· Net assets were £41.475 million (74.59p per share);

· The loss for the year was 18.47p per share;

· Nevertheless, the manager's assessment of the portfolio's intrinsic value[1] compared to the current market values of these positions has increased since last year;

· Strategic initiatives, which include management change, acquisitions and disposals, amongst other corporate activity, have been implemented across the portfolio, providing the building blocks for future growth.

· The Company is now almost fully invested with 13 investments, the majority of which are performing in line with market expectations or better at an operational level;

· The portfolio comprises a spread of businesses all of which are at an interesting transformational stage, likely to deliver exceptional long-term shareholder returns;

· A share buy-back programme was put in place over the recent close period, but continuing investor interest in this value-based portfolio has meant that buy-backs have been modest .

· Dividend for the year of 1.25p per share, due to the receipt of distributable income above the threshold set by investment company regulations

Judith MacKenzie, the lead fund manager, said "Market value of investments has declined significantly on account of a handful of positions (Gama, Redhall, FireAngel) reflecting their need for change. Our other nine positions have performed rather well and, overall, we believe the difference between our calculation of the intrinsic value of the portfolio and how the market is valuing them, is greater than at any point since the Company was launched. We have been active across the portfolio, , helping our investee companies adopt appropriate governance and tackle strategic challenges - so that they are positioned to deliver, and this provides us with a high level of confidence for the funds performance."

DOWNING STRATEGIC MICRO-CAP INVESTMENT TRUST PLC

Annual Results announcement for the year ended 28 February 2019

Financial highlights

	28 February 2019	28 February 2018	Change %
Assets
Net assets (£'000)¹	41,475	51,744	(19.85)
Net asset value (NAV) per ordinary share	74.59p	93.06p	(19.85)
Mid market price per ordinary share	73.00p	93.60p	(22.01)
(Discount)/premium	(2.13)%	0.58%

Revenue	Year ended 28 February 2019	Year ended 28 February 2018
Revenue return per ordinary share	1.50p	(0.03p)
Capital return per ordinary share	(19.97)p	(6.22p)
Total return per ordinary share	(18.47)p	(6.25p)
	%	%
Decrease in NAV since admission²	(25.41)	(6.94)
Decrease in share price since admission²	(27.00)	(6.40)
¹ The change in net assets reflects market movements during the year. ² 9 May 2017.

Operational highlights

The Company now holds positions in the following businesses;

AdEPT Technology Group PLC (AdEPT)

Braemar Shipping Services PLC (Braemar)

Duke Royalty Limited (Duke Royalty)

FireAngel Safety Technology PLC (FireAngel)

Gama Aviation PLC (Gama)

Hargreaves Services PLC (Hargreaves)

Pennant International Group PLC (Pennant)

Ramsdens Holdings PLC (Ramsdens)

Real Good Food PLC (RGF)

Redhall Group PLC (Redhall)

Science in Sport PLC (SiS)

Synectics PLC (Synectics)

Volex PLC (Volex)

- Fully deployed in 13 companies

- £27,417,000 invested in equity and £7,909,000 in high yielding loan notes

- RGF now turned around and realising value from its portfolio of businesses

- Three companies behind on execution versus our investment case

- The remainder of the portfolio performing operationally in-line but with negative sentiment

- Active engagement evidenced across the entire portfolio

Chairman's statement

Whilst I am mindful of reporting a decline in net asset value ("NAV") and share price over the last two years shareholders should be reassured that the Company's value investing is well thought through and a sound foundation for the Company's portfolio. The investment management team's assessments of each investment indicates that the Company's market NAV sits at around 75%¹ of current longer-term portfolio value. Realising value for the Company will come as the market, or acquirers, focus on particular stocks. Meanwhile the portfolio's intrinsic value remains demonstrable and is increasing. Regular reporting on the portfolio is provided through exceptional quarterly investor letters which I commend to all current and prospective investors and which are available from the website or by email.

Short term damage to your Company's share price has come from three or four investments and has been due almost entirely to failings in corporate management and governance. I will discuss that in principle; detail is covered in the Investment Manager's Report. Each investment, still sound, is receiving close attention.

Where there has been a problem, it has not been because there was anything fundamentally wrong with the business or its market; the Investment Manager's in-depth analyses have generally proved sound. What has emerged on active investing, and with, in one case, a seat on the board, has been the need for a change in the management and an overhaul of the governance of those companies. Our expectation of boards of public companies is that they should do the job required of them by law and regulation and that their audited accounts should be reliable. Unfortunately, you will see from the Investment Manager's Report that, for otherwise good businesses, our Investment Manager has had to 'encourage' quite a lot of management and board change; more so than we anticipated. Your Board's support for the determination of the investment management team remains unwavering.

In my view this activism may reflect a need that rings true more widely: a need for stronger management and better governance.

I said six months ago that "to some extent cheap assets remain cheap for longer than your board would hope" but I did say that "by and large nearly all of our investments are progressing well as businesses" and that is still the case. Three, maybe four, of the portfolio are behind the investment thesis, but all have action plans in place to address that. Four or five are 'in-line' with expectations and at least another four are progressing nicely and deserve much better market recognition. Change takes time.

Your company has now invested in 13 quoted businesses; every investment made as a significant, long-term holding in good markets generating good margins. Nevertheless, shareholders will see from the Investment Manager's Report that across our 13 investments there have been 29 board or management changes. Some of those changes have been made naturally by well-managed businesses building their succession and managerial strength for themselves - AdEPT Technology would be an example. Synectics would also get a 'thumbs up'. Others have needed encouragement, typically led by the Downing team, in order to bring about change.

A year ago, and regularly reinforced subsequently, we set out what we expect of boards of directors. We said we would be truly active investors, and we have been. Inadequate boards have found that we are deadly serious. Passive boards and weak audit committee chairmen who don't challenge management are not doing their job. 'Incorrect' accounting or massaging the figures, regrettably accepted by auditors, are also not acceptable to us.

Your Company is as it set out to be: active and activist amongst small, listed companies of potential, unappreciated value and consequently mispriced. The creation of wealth through good leadership and corporate governance may sometimes take a while to feed through to stock markets. However, as long as our Investment Manager's assessment of the businesses continues to be right most of the time, and they are actively engaged, our shareholders should know that in this Company they have an investment that is distinctive, if not unique, with potential value considerably more than the share price. Your Board will do its best to begin to get that value recognised over the next year and into the future.

I continue to increase my personal 'skin' in your Company.

Dividend

The Company does not have a dividend target. This year we have benefitted from loan interest and investment company regulations require 85% of a year's distributable income to be distributed. We are proposing a modest dividend of 1.25p per share for the year. Subject to approval by shareholders at the annual general meeting ("AGM") the dividend will be paid to shareholders on 5 July 2019 to shareholders on the register at 24 May 2019 (ex-dividend date 23 May 2019).

Share price and NAV

I am pleased to report continuing interest by shareholders and by new investors in the Company's shares; discounts have remained modest. Shareholders will have noticed that we put in place a buy-back agreement with the Company's brokers to cover the recent close period. Shares bought back are held in treasury; at the time of writing the holding is 250,000. In reasonable markets, we, and the Investment Manager, work to maintain interest in the Company's shares.

The Quoted Companies Alliance and the Henley study

Downing LLP and the Quoted Companies Alliance ("QCA") have sponsored a study by Henley Business School² into the role and contribution of boards of directors to growth companies. The findings are mapped against the 10 Code Principles of the QCA and emphasise how the role of the chair is central. That study is for discussion in another forum, but we would like to see the QCA Code of Principles followed by all boards.

The year ahead

We now have a challenging year ahead to prove to shareholders that your Company's hands-on, intense, active management style lifts the value that lies in the constituents of your Company's portfolio.

AGM

The AGM last year was well attended. This year it will be held at the offices of Downing LLP, 6th Floor, St Magnus House, 3 Lower Thames Street, London, EC3R 6HD on Tuesday, 25 June 2019 at 2.30 pm. The management team will be making presentations and I encourage shareholders and potential shareholders to attend.

Finally, thank you to board colleagues for their contribution, lifted by our latest non-executive director Dr Linda Bell.

Hugh Aldous

Chairman

2 May 2019

¹ (Intrinsic value/current price) - 1. Intrinsic value = NPV of free cash flows under Downing base case assumptions. Average upside 132.63%, Median 97.69%, Weighted average 76.33% - see April 2019 Investor Letter and the following Investment Manager's Report.

² Henley Business School University of Reading Research report by Prof Kakabadse and others.

Investment Manager's Report

"The best executive is the one who has sense enough to pick good (wo)men to do what (s)he wants done, and self-restraint to keep from meddling with them while they do it."

Theodore Roosevelt

There has been a tremendous amount of management change in our portfolio of 13 investments over the last 12 months. By and large, we believe we have the correct leaders in place to drive the underlying value within these companies. Now we need to let them get on with the job and not 'meddle', rather provide supportive challenge and ensure good governance is adhered to. For us as Manager, the first two years of the life of the Company have been intensive, hands-on and verging on activist. Such is the nature of strategic investing.

It has not been a simple transformation; each company is at a different stage in its evolution. Strategic investing, defined as "an individual or company that adds value to the money it invests, through contacts, experience and knowledge to the company in which it is investing, thus brightening the investee's prospects for success*", unavoidably requires patience as the transformation takes place. For this to be effective, there is inevitably the need to facilitate and accept change. Fortunately, as managers we have both patience and the ability to influence transformation - most importantly, we are able to quantify our calculation of the intrinsic value of the portfolio as the journey continues.

The Company was launched in May 2017, and at the date of this report, is 87.85% invested in 13 companies. The first 12 months were that of the investment phase. As I write, we are about to enter our third year, and the second year was typified by ensuring that the correct management skills were in place to execute on strategic plans. Consequently, during 2018/early 2019 there has continued to be a lot of change in the underlying businesses.

The table below provides a school report of the changes that have been made within our investee companies since we made these investments.

Company	Board Change		Management Change		Restructure		Acquisition / Disposal
AdEPT Technology Group	2		1				1 acquisition
Braemar Shipping Services	2		1		1		2 acquisitions and 1 disposal
Duke Royalty							1 acquisition
Real Good Food	4		2		1		4 disposals
Synectics	1		1		1
Science in Sport							1 acquisition
Redhall Group	2		2		1
Ramsdens Holdings							1 acquisition
Pennant International Group							1 acquisition
Hargreaves Services	1		2				1 disposal
Volex							3 acquisitions
Gama Aviation	4		1				5 acquisitions
FireAngel Safety Technology	1		2		1
Total	17 Board Changes	12 management changes		5		15 acquisitions 6 disposals

Data as at 1 May 2019, since investment by the Company.

17 board changes, alongside 12 management changes have been made in our 13 active investments, and it is likely that there will be more in the future. Largely, these changes are at chair level and are therefore the most effective for managing further change. 12 management moves have been made in our investments, 41% have gone through some kind of restructuring, and of the 13 companies , 15 acquisitions have been made and six companies divested.

This demonstrates an active period of corporate activity.

We would not expect this continuing level of corporate activity over the next 18 months. Instead, we expect that the management teams will take the benefit of the initiatives put in place and deliver on their strategic plans. We believe they are well on the way to creating the shareholder value that they are capable of.

We are pleased to say that the gap between market value and intrinsic value (our calculation of the real value, not a stock market value, of the investments) has increased. This is reflective of the work being carried out to make these transformational changes. Although the Company should be measured for its performance over the longer term, the investment managers should be judged for their activity in implementing transformation and recovery.

It would be easy for us to pretend that we knew of the transformation required in each investment at the time we invested. Although the journey has been smooth in 9 out of 13 of our investments, the curved balls that have been thrown in a handful of cases have been time consuming and expensive in the short term. Many of the 'unknown' issues came to light as we continued to build our knowledge and challenge the quality of the boards. You learn an awful lot more once you get into bed with a company than you do from the sidelines. In some cases, our fact-finding hasn't been palatable, however that is what we get paid for; strategic investing isn't just about buying good companies cheaply, it is also about being prepared to embrace the need for change and optimise the eventual outcome for all stakeholders. In this regard, we have been very active on your behalf. Our strategic portfolio contains a couple of 'recovery plays'. Where faith in the company has been abandoned, financial inefficiencies have been identified and remedy has been be applied to realise value.

We feel that the catalysts for change that have been put in place have already started to demonstrate value creation, and should therefore be reflected in the value of these businesses over the next 12 to 18 months.

*Source: Business Dictionary http://www.businessdictionary.com/definition/strategic-investor.html

The J Curve - and the life cycle of a strategic investment

Strategic and recovery investing is not for the faint hearted and, as the NAV of the Company has demonstrated, can reflect negative sentiment long before positive initiatives are understood. This is a familiar trait of private equity investment funds, often called the J Curve. It is not uncommon for private equity funds to show losses before turning positive years after launch. We realise that this requires patience and belief on behalf of investors. We note that at the start of an investment cycle there is often a disconnect between what the investor thinks might happen and what might actually happen.

No more mediocre management. It is all about premier league leadership

To optimise a business' financial results, companies often hire managers with a proven track record of doing so. Famous "turnaround" CEOs include Al "Chainsaw" Dunlap, who was hired in 1996 to turn Sunbeam around, or Jacques "The Knife" Nasser, who was tapped in 1999 to revitalise operations at Ford. Although we do not have any CEOs with such 'interesting' names, we do have a number of chairmen and CEOs who exhibit the attributes of these famous turnaround specialists.

On our 'bench' we have Hugh Cawley, CEO of Real Good Food. So far, he has led the turnaround of the business, disposing of four non-core assets, paying down debt, leading the restructure of the cost base and now ultimately returning the group to profitability. This is a good example of a company approximately 75% of its way through the pain and on the way up the J curve, having been at the depths of it a year ago.

Meanwhile, John Conoley, Non-Executive Chairman, of FireAngel is at the start of the journey. Having come on board in January 2019, John is working with the competent management team to exercise best practice, prioritise and execute. No mean feat for a business that has experienced so much change. This company is now 'tooled up' and knows what it needs to do. We hope hindsight will prove us correct in saying that FireAngel has experienced the bottom of the J curve.

Ron Series of Braemar has just (April 2019) arrived in the saddle and has taken the reins as Non-Executive Chairman. We expect good things.

Joe Oatley of Redhall has stepped up to become chair and is driving the strategic direction of the business and its working capital issues over the short term.

Roger McDowell has been on board at Hargreaves now for over six months. We are reassured by the changes he has implemented, whilst engaging effectively with management. Hargreaves is on a clear path to value realisation.

Simon To of Gama has a big job ahead of him. He promises appropriate governance, controls and integrity - attributes that the board has been desperately lacking given the calamitous last 12 months. We lend him support in the challenges that inevitably lie ahead for Gama, as it begins its recovery.

Intrinsic Value of the Portfolio

The intrinsic value of the portfolio is significantly above the current NAV. The intrinsic value is the investment manager's calculation of the net worth of the businesses. This is a calculation based predominantly on the value of future free cash flows, but also includes the investment manager's judgement of quality of earnings, and the ability of management to drive to a strategic goal. We believe that the weighted average upside in the portfolio is over 75%, based on the underlying portfolios prospects as of today.

Portfolio valuation statistics

as at 31 March 2019	P/book	P/earnings¹	Margin of safety²	Upside³
Average	1.45	7.61	46.54%	132.63%
Median	0.92	7.59	49.42%	97.69%
Weighted average	1.37	6.15	35.53%	76.33%

1 Normalised as: (Downing EBIT - (2.5%* debt))* (1 - tax rate). Excluding Science in Sport with negative P/ earnings

2 1 - (current price/ intrinsic value). Intrinsic value = NPV of free cash flows under Downing base case assumptions. Price from FactSet

3 (Intrinsic value/ current price) - 1. Intrinsic value = NPV of free cash flows under Downing base case assumptions. Price from FactSet

Portfolio construction

As at 31 March 2019

Name	Sector	Age⁵	Progress against thesis⁶			Market cap (£m)			%of the Portfolio⁷			% equity held by Downing⁸
AdEPT Technology Group	Telecommunications	1.75	Ahead		76.08			8.51%			12.11%
Braemar Shipping Services	Transportation	1.50	Behind		51.87			4.10%			6.59%
Duke Royalty	Speciality Finance	0.75	Ahead		86.94			4.79%			6.37%
FireAngel Safety Technology	Electrical Equipment	1.25		Behind			9.65			0.76%			10.73%
Gama Aviation	Transportation	1.50		Behind			41.05			3.35%			7.12%
Hargreaves Services	Support Services	1.25		In-line			97.48			7.45%			7.02%
Pennant International Group	Software & Services	0.25		Early			43.25			2.63%			5.28%
Ramsdens Holdings	Financial Services	1.50		Ahead			56.28			6.76%			16.77%
Real Good Food⁹	Food Producers	1.75		In-line*			5.71			17.79%			7.90%
Redhall Group⁹	Support Services	1.75		Behind			5.99			3.48%			23.91%
Science in Sport	Food Producers	1.50		In-line			63.87			2.59%			5.64%
Synectics	Support Services	1.25		In-line			38.26			9.57%			12.86%
Volex	Electrical Equipment	1.00		Ahead			134.84			13.49%			7.38%

5 Weighted average age of the portfolio investment, including initial investment and all follow-on investments. Rounded to nearest 0.25.

6 Based on Downing's interpretation of progress against original investment thesis, or revised thesis*, where applicable

7 Includes cash

8 Total percentage of investee company held by all Downing managed funds

9 Real Good Food holding includes 0.69% equity and 17.10% debt split. Redhall holding includes 1.82% equity and 1.66% debt split.

Outlook

We could blame Brexit (or the lack-of), market volatility in AIM and small cap, and we could even blame the weather for our decline in NAV over the last 12 months. That would be wrong. The decline in NAV is directly correlated to the businesses in which we have chosen to invest, where the market value has declined significantly in a handful of positions (Gama, Redhall, FireAngel) reflecting their challenging trading and the need for change. Our other ten positions have performed rather well. We have been very active with the 'problem children', working hard to help these businesses adopt appropriate governance and face their strategic challenges.

We hope that you will have seen our interviews with management of some of our investees, and that you will be able to attend Mello 2019, where several of our investments will be exhibiting.

https://player.vimeo.com/video/317275711 https://player.vimeo.com/video/319510900

http://downingstrategic.co.uk/sites/default/files/dsm_q119.pdf

As we enter our third year, we are very aware that shareholders in the Company need a reward for their patience to date. We firmly believe that 2019 is going to be a year that demonstrates that the strategic initiatives and work that has been undertaken in 2018 begins to realise value for all stakeholders in these businesses.

Judith MacKenzie

Partner and Head of Public Equity, Downing LLP

2 May 2019

Investments

As at 28 February 2019	Market Value (£'000)	% of investments
Real Good Food 10% Loan Note (29/06/2020)¹	6,014	14.50
Volex	5,373	12.95
AdEPT Technology Group	3,632	8.76
Synectics	3,554	8.57
Hargreaves Services	3,090	7.45
Ramsdens Holdings	2,611	6.30
Duke Royalty	1,927	4.65
Braemar Shipping Services²	1,889	4.55
Gama Aviation	1,525	3.68
Real Good Food 12% 'C' Secured Guaranteed Loan Note (16/05/2021)¹	1,195	2.88
Pennant International Group	1,101	2.65
Science in Sport	1,093	2.63
Redhall Group	901	2.17
Redhall 12.5% Loan Note (01/10/2019)¹	700	1.69
FireAngel Safety Technology	403	0.97
Real Good Food	318	0.77
Total Investments	35,326	85.17
Net current assets	6,149	14.83
Total investments	41,475	100.00

1 Unquoted

2 Quoted on the Main Market

All investments are in ordinary shares and traded on AIM unless otherwise indicated.

The total number of holdings as at 28 February 2019 was 13 (28 February 2018: 10). Details of the equity interests comprising more than 3% of any company's share capital are set out in note 18.

As at 28 February 2019 loan notes represented 19.07% (2018: 17.50%) of the portfolio.

The table above includes net current assets of £6,149,000 that are also disclosed in the statement of financial position.

Portfolio Distribution

As at 28 February 2019

Real Good Food*	18.15%
Volex	12.95%
AdEPT Technology Group	8.76%
Synectics	8.57%
Hargreaves Services	7.45%
Ramsdens Holdings	6.30%
Duke Royalty Common NPV	4.65%
Braemar Shipping Services²	4.55%
Gama Aviation	3.68%
Pennant International Group	2.65%
Science in Sport	2.63%
Redhall Group**	3.86%
FireAngel Safety Technology	0.97%
Net current assets	14.83%

* Loan notes represent 17.38% of the portfolio holdings and equity 0.77%.

** Loan notes represent 1.69% of the portfolio holdings and equity 2.17%.

Background to the investments

(unless otherwise stated all information provided as at 31 March 2019)

AdEPT Technology Group PLC (AdEPT) (8.76% of net assets)

Cost: £3.63m. Value as at 28 February 2019, £3.63m.

Update to the investment case

Good:

· Interim results released in November 2018 were positive, with EBITDA up 10.7% year-on-year

· November 2018 acquisition of ETS Communications

· Phil Race appointed as new CEO. Incumbent CEO, Ian Fishwick, moves to chairman

· Extension of bank facility by £5 million to a total of £35 million

Progress against investment case

This is a quality business with attractive recurring revenue. Our investment case was predicated on the ability of management to acquire businesses at a good price, and the migration to become a managed service business. AdEPT acquired two businesses in the second half of 2018. ETS Communications is the most recent and brings with it a complementary skill set, a robust customer book of over 200 GP surgeries, and is expected to be approximately 5% accretive to group revenue. The managed services division attracts high quality, recurring revenues, and now accounts for 74% of group turnover. We have also seen Phil Race appointed to CEO as of 1 January 2019 and Ian Fishwick move into the chairman role. We see this as a positive step for the business that will allow Ian Fishwick to focus on delivering the long-term strategy with the reassurance that operations are being overseen by an experienced leader of technology businesses as CEO, and proven Finance Director in John Swaithe.

Braemar Shipping Services Plc (Braemar) (4.55% of net assets)
Cost: £3.00m. Value as at 28 February 2019, £1.89m.

Update to the investment case

Good:

· The Shipbroking division has had a strong second half with full year profits expected to be ahead of the market expectations

· Ron Series appointed as new chairman

Bad:

· Marine Services continues to experience challenging conditions and the board is working on a structural change

Progress against investment case

The long-term upward trend for seaborne trade continues and as expected shipbroker margins are improving. However, the marine services business has hit stumbling blocks that have resulted in the expected cost savings not materialising. Another restructuring in a similar vein would likely prove unsuccessful and the group is considering its strategic options to boost the focus and pace that this unit demands.

Duke Royalty Limited (Duke) (4.65% of net assets)
Cost: £2.06m. Value as at 28 February 2019, £1.93m.

Update to the investment case

Good:

· Interim results released in December 2018 were in line with expectations; Revenue +350%, Royalty Investments +523% year on year

· Dividend increased by 17% year on year

· Acquisition of Capital Step, the company's only known competitor

· New Royalty Agreements and follow-ons consistent with longer-term strategy

· Director share purchase

Progress against investment case

Our investment case was predicated on the identification of suitable royalty partners and deployment of capital into these companies. Progress against this has been accelerated through the acquisition of Capital Step, which we view as a sensible deal to consolidate the market at an attractive 15% cash-on-cash yield. This has the added benefit of further diversifying the portfolio through the addition of a further six royalty partners. The deal deploys a further £10 million of capital that when combined with the £1 million follow-on into the existing Brownhill's royalty partner and the completion of a new £10 million agreement with MRDB leaves Duke approaching full deployment ahead of our expectations. The recently announced dividend suggests a yield for the coming year of over 6.0%.

FireAngel Safety Technology Plc (FireAngel) (0.97% of net assets)

Cost: £2.89m. Value as at 28 February 2019, £0.40m.

Update to the investment case

Good:

· Restructuring of balance sheet with £6m raise

· New senior appointments - FD, Chair and Operations Director

· Trading in line with revised expectations

· Further local council contract wins in Scotland

· Directors buy shares

Progress against investment case

It has been a challenging 12 months for FireAngel, the manufacturer and distributor of fire safety products. Management faced an aggressive legal challenge over the termination of a distribution agreement, took its eye off the ball in one of its main markets (Germany) and lost sales, faced manufacturing issues, issued a profit warning, and lost an FD - none of this was in our initial investment case.

Although some of these issues were self-inflicted and arguably badly managed, the fundamentals remain intact; the company has a strong position in a growing and regulated market. Although we understand that businesses don't always run smoothly and often face external challenges, we expect our management teams to adapt and plan accordingly. In the last six months the company has gone through structural and management change. We are delighted to have John Conoley as chairman, Mike Stillwell as FD, and a new COO, Andy Gregg. In addition, we ensured that a £6 million raise was completed, and 'underwrote' a large percentage of the raise, at what we believe was an attractive price. The instruments for effective and managed growth are now in the tool box.

As we have said previously, we love the regulated markets in which FireAngel operates, and its barrier to entry through IP. We believe that these initiatives mean the company will be more efficiently managed, and more capable of adapting to challenges. It is all there for FireAngel to achieve; they have a strong position in growing and regulated markets and well invested IP. Now we want to see that they can execute.

Gama Aviation Plc (Gama) (3.68% of net assets)

Cost: £5.29m. Value as at 28 February 2019, £1.52m.

Update to the investment case

Bad:

· Operational challenges and delays around deploying capital have led to management reducing their expectations for forecast periods

· Delay in announcing new chairman

Neutral:

· Capital deployment into US maintenance facilities has been moving ahead and a small acquisition of a completions facility was finalised in January 2019

Good:

· Business continues to secure new contracts with the Ministry of Defence and Scottish Air Ambulance

Progress against investment case

Post the fundraise last year, the business has hit several stumbling blocks. Capital has not been deployed as expected and the appointment of a strong new FD has uncovered some questionable financial reporting practices. Unfortunately, we underestimated the ability of the board to impose the expected checks and balances on a business of this size and complexity.

Despite the disappointing governance, the business does continue to perform respectably well which demonstrates the viability of the model. In December, the company announced that between £93.5 million and £115.5 million of contracts had been awarded to support special missions' operations.

We have confidence that with the correct governance in place this is a viable business which can be turned around and generate a healthy return for our investors. We are working hard to ensure that an equitable governance structure is put in place that will represent all minority shareholders.

Hargreaves Services Plc (Hargreaves) (7.45% of net assets)
Cost: £3.65m. Value as at 28 February 2019, £3.09m.

Update to the investment case

Good:

· Large amount of tangible asset value

· Market discount can be realised

· New board appointments are positive

Progress against investment case

Hargreaves Services is a good example of an asset heavy balance sheet alongside profitable operations. Owing to legacy capital-intensive operations, there is a large amount of tangible asset value as previously detailed. This has been difficult to access, and the market discounts this materially given that the business trades on a substantial discount to its true book value. We believe this discount can be realised by further spinoffs and cash returns to shareholders.

We supported the appointment of Roger McDowell, the new chairman, and he has put shareholder interests first and we are pleased with how the management team has responded. In the period we met David Anderson, who was appointed as the newly created position of Group Property Director and also sits on the board.

Pennant International Group Plc (Pennant) (2.65% of net assets)
Cost: £1.04m. Value as at 28 February 2019, £1.10m.

Update to the investment case

Good:

· Ambitious chair and CEO driving culture

· Continued investment and product improvement

· Acquisitions can help advance strategic aims

Progress against investment case

Our newest position is a small stake in Pennant International Group Plc, a training provider to the defence and civil markets. The company has a long trading history, great IP and accreditations. However, it has been a sleepy relatively unknown company until a few years ago. It underwent a governance change led by chairman Simon Moore and this has invigorated the partly new management team led by a hard-working and hungry CEO, Philip Walker. Philip has subsequently moved the company's culture and ambitions forward. It has continued to add to the order book, almost tripled its manufacturing base and has added innovations to cash cow product offerings. By way of an example, over £1 million has been invested in FY2018 (2015: £35k, 2016: £250k and 2017: £600k). In the 15-year period prior to 2017 only one new product had been created.

For us, the attraction of this company is that we think it can continue to invest and see a return above its cost of capital and improve the quality of the business at the same time. These initiatives include: capturing more of the value chain - focus on selling more services linked to Pennant hardware; diversifying the defence client base - targeting civil customers in aviation and rail; improving the quality of business - selling more of its software products that benefit from recurring income.

In the recent period, Pennant has continued to announce new contract wins and has acquired a small bolt on aviation training provider. The deal, which we supported, provides a great low risk platform for Pennant to advance its strategic aims. Looking forward, we expect, indeed encourage, the investment programme to continue.

Ramsdens Holdings Plc (Ramsdens) (6.30% of net assets)
Cost: £2.62m. Value as at 28 February 2019, £2.61m.

Update to the investment case

Good:

· Interim results released in November 2018 were in line with expectations; Revenue +10%, Dividend +9%

· 8 sites opened as of November

· Acquisition of 18 Money Shop stores

· Earnings reduced 3% as a result of new store opening costs

Progress against investment case

Our investment case centres on management's ability to expand the estate at a rate of six new sites per year and drive organic growth from the existing estate across four diversified revenues streams. Our assumption of six new sites has been greatly exceeded thus far with eight being opened in FY19 thus far and a further 18 sites being acquired from the Money Shop. Our calculations place the acquisition cost at a very attractive approximately 4x earnings and we expect this to be accretive in the coming years. An additional five Money Shop sites will be rolled into existing nearby Ramsdens stores allowing for an accelerated increase in revenue at these locations. In summary, the company has hit our year four expansion target in its first year. On the organic side, the business has again outperformed on all fronts excluding the only fly in the ointment that was the foreign exchange business where income from foreign exchange declined 2%. This has been attributed to the unseasonably hot summer of 2018 and the World Cup reducing the amount of leisure travel. We expect this to return to a more normalised growth rate through FY20.

Real Good Food Plc (Real Good Food) (including loan notes) (18.15% of net assets)

Cost: £9.07m. Value as at 28 February 2019, £7.53m.

Update to the investment case

Good:

· Four disposals - Garretts, Hayden's, R&W Scott & Chantilly

· Terms agreed for new funding

· Open Offer to raise £1 million

· New NEDs appointed

· Latest results September demonstrate the impact of turn around

· Departure of FD - due to there not being a need for a full time FD post turnaround and disposals of non-core assets

Progress against investment case

It has been a busy year for the board of Real Good Food. There was a lot of work involved in the turnaround of this business, however the company now has a transformed balance sheet with no term debt, benefitting from the proceeds of four disposals during the last 12 months, which netted gross proceeds of £17.95 million.

The arrival of two independent Non-Executive Directors has helped address the previously poor governance.

The investment case was that the sum of the parts of the divisions was greater than the market capitalisation and enterprise value at our entry point, and this remains the case. The two remaining businesses, Brighter Foods, a welsh-based manufacturer of health bars, and Renshaw, a producer of speciality sugar pastes and decorations for the confectionary market, have a historic combined EBITDA of over £4 million. Therefore, with a management team and strategy to drive value from these attractive businesses, we expect continued progress and ultimately a trade exit from this business.

Redhall Group Plc (Redhall) (including loan notes) (3.86% of net assets)

Cost: £5.00m. Value as at 28 February 2019, £1.60m.

Update to the investment case

Good:

· Jordan won three contracts with Balfour Beatty

· FD replaced by Simon Cromer (ex FD at Applied Composites)

· Appointment of Joe Oatley as Chairman (ex CEO of Cape and ex CEO of Hamworthy)

· New interim CEO appointed

Bad:

· Full year trading update to 30 September 2018 - delays on contracts mean full year results will be materially below expectations

Progress against investment case

Redhall has made progress in growing its order book, although it has been slow on both delivery and execution of it. Frustratingly, contract delays have consequently had an impact on working capital. Given these are large infrastructure projects, such as Crossrail and Hinckley Point C, and are often subject to delays, there was an inevitable knock on effect to Redhall. Ultimately, you would want this type of contracting business to have sufficient regular smaller business to weather the bumps, however this has not been the case. Although we now have a team that is more focused on engineering efficiency and best practice than ever before, there is still a lot of work to do. We cannot dispute the fact that Redhall either needs to be part of something larger or gain critical mass itself.

We are of the view that a potential acquirer will value the toe-hold that Redhall provides into UK

nuclear and infrastructure. Our strategic position of 22.9% across Downing client funds, has been accompanied by a £700,000 loan to the company, carrying a 12.5% redemption premium for its eight-month term. This allows us the influence and investor rights to ensure the correct corporate activity is followed.

Science in Sport Plc (SiS) (2.63% of net assets)

Cost: £1.50m. Value as at 28 February 2019, £1.09m.

Update to the investment case

Good:

· Strategic acquisition of PhD Nutrition completed in November 2018

· Results highlight continued impressive revenue growth in SiS

· Strategic investments into the US and football have a strong foothold

· Core SiS business generated £2 million of operating profit demonstrating the profitability of the underlying model

Progress against investment case

Science in Sport is delivering underlying results as expected with continued strong revenue growth. The acquisition of PhD Nutrition looks to be a sensible one with complementary premium products and opportunities to extract some synergies. Despite this, we thought that the deal looked expensive, so we chose not to participate. The profitability of PhD should go some way to supplement the losses of SiS as that business continues to scale. We think that the combined entities could make an attractive portfolio of premium and high margin sports nutrition businesses to a strategic buyer.

Synectics Plc (Synectics) (8.57% of net assets)

Cost: £3.98m. Value as at 28 February 2019, £3.55m.

Update to the investment case

Good:

· Multiple contract wins, latest a multi-million dollar new customer

· New FD appointment in September 2018

· November, trading update in line. Restructure of bus division

· Final results to 30 November 2018 in line with market expectations

Bad:

· Departure of FD, appointment of Acting Finance Director

Progress against investment case

Synectics continues to quietly manage the business and modestly outperform against expectations. The new oil and gas contract is encouraging, as is the decisive action taken to cut costs in the bus sector which had been in decline. The investment over the last few years in the Synergy software has yielded benefits and instead of just being a box seller, the company is beginning to command software-like margins.

It is important for the story to be told and we are encouraging the board to tell investors what they are doing as the company is on a single digit PE, has net cash and some interesting growth attributes for the next few years.

Rather frustratingly the new FD left for personal reasons only six months after he had started. Therefore, the search begins again for another, however we are very reassured that Amanda Larnder, has stepped up to be Acting Finance Director.

Volex plc (Volex) (12.95% of net assets)

Cost: £4.78m. Value as at 28 February 2019, £5.37m.

Update to the investment case

Good:

· Volex continues to perform well ahead of our expectations

· Four earnings upgrades since we invested in May 2018

· Revenue growth supplemented by cost efficiencies and margin improvements across the business

· Management continues to deliver a seriously impressive turnaround project with plenty of upside remaining

· Proposed return to the dividend list in FY2020 demonstrates management's confidence of sustainable cash generation going forwards

· Management continue to buy shares

Progress against investment case

The company reported impressive half year results in November followed by a third acquisition, post the fundraise, of GTK in December. The trading update in March 2019 was the fourth earnings upgrade delivered by the company since we invested less than a year ago.

We believe that the shares remain abnormally cheap with the year-end trading update signalling further revenue and margin growth. Free cash flow generated in the second half at $10 million was the key takeaway for us. The business remains in a net cash position of $18.4 million which leaves significant headroom for further acquisitions and scope to pay a dividend from next year.

Strategic Report

The Directors present the Strategic Report of the Company for the year ended 28 February 2019. The aim of the Strategic Report is to provide shareholders with the information required to assess how the Directors have performed their duty to promote the success of the Company during the year.

Business model

The Company invests in accordance with the investment objective. The Board is collectively responsible to shareholders for the long-term success of the Company. There is a clear division of responsibility between the Board and the Investment Manager. Matters reserved for the Board include setting the Company's strategy, implementing the investment objective and policy, capital structure, governance and appointing and monitoring of the performance of service providers, including the Investment Manager.

As the Company's business model follows that of an externally managed investment company, it does not have any employees and outsources its activities to third party service providers including the Investment Manager who is the principal service provider.

Status of the Company

The Company is an investment trust company that has a premium listing on the London Stock Exchange. Its principal activity is to carry on business as an investment trust.

The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and it has been approved by HM Revenue & Customs as an investment trust (for the purposes of Sections 1158 and 1159 of the Corporation Tax Act 2010) for the period ended 28 February 2018 and future years. The Directors have no reason to believe that approval will not continue to be obtained. The Company is not a close company for taxation purposes.

As an investment company managed and marketed in the United Kingdom the Company is an Alternative Investment Fund (AIF) under the provisions of the Alternative Investment Fund Manager's Directive (AIFMD). The Company was registered by the FCA as a Small Registered UK Alternative Investment Fund Manager (AIFM) with effect from 16 March 2017.

The Company currently conducts its affairs so that the shares issued by the Company can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the FCA's rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future.

Investment policy

The Company intends to invest in UK publicly quoted companies that are defined by the Investment Manager as micro-cap, reflecting a market capitalisation of under £150 million of the investee company at the time of investment.

The Investment Manager will select a concentrated portfolio of between 12 and 18 investments (once fully invested). The Company will seek to hold between 3% - 25% of the equity of these investee companies, although it may hold larger or smaller stakes when it deems appropriate (including up to a maximum of 29% of the equity of any one company at the time of investment), but only where the Company holds an additional right of conversion (e.g. option rights or convertible loan notes) that would, on exercise, result in the Company holding above 25% of the equity). It is likely that the majority of the investments held in the Company's portfolio will be quoted on AIM and will typically be drawn from the Numis Smaller Companies Index plus AIM (Excluding Investment Companies).

The Investment Manager will:

- deploy a private-equity style diligence approach to investing, focusing on the future value of free cash flows, sustainability of margins and strength of the management team;

- take advantage of the inefficiencies within the microcap market which include lack of analyst coverage;

- have the ability to invest up to 10% of the Gross Assets at the time of investment in unquoted or untraded companies, or in any one unquoted or untraded company;

- procure that the Company invests where analysis indicates an ability to create shareholder value of 15% compound growth per annum over a 3-7 year investment horizon;

- favour a proactive style of engagement with management, aiming to maximise shareholder value over the long term particularly where diligence highlights a strength of management, an entry value that is a discount to the Investment Manager's calculation of intrinsic value, and where active engagement is likely to mitigate some of the inefficiencies presented by the micro-cap market.

The Investment Manager believes that this is best achieved by the Company taking strategic shareholdings between 3% - 25% of the equity of the investee company, although the Company may hold larger or smaller stakes where it deems appropriate (including up to a maximum of 29% of the equity of any one company at the time of investment, but only where the Company holds an additional right of conversion (e.g. option rights or convertible loan notes) that would, on exercise, result in the Company holding above 25% of the equity). No single investment will represent materially more than 15% of the Gross Assets at the time of investment save that the Company may make a follow on investment into an existing investee company where such investment may result, due to fluctuation in market conditions, in a single investment representing up to 15.5% of Gross Assets at the time of investment, where this is likely to maximise the value of the Company's existing investment for Shareholders. The Company's portfolio is expected to be diversified by industry and market but stock selection will be determined by the results of extensive due diligence rather than a weighting in any particular index. However, the Investment Manager will not invest on behalf of the Company in early stage technology, mining and extraction companies and early-stage biotech (unless the Company can see a defined route to profitability) and does not intend to invest in initial public offerings, unless in exceptional circumstances where it has a historic relationship with and an in-depth knowledge of the investee company.

The Company may use derivative instruments including index-linked notes, contracts for difference, covered options and other equity-related derivative instruments for efficient portfolio management, gearing and investment purposes. Any use of derivative instruments for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Company's direct investments, as described above, although the Company would not hold more than 5% of Net Assets in a derivative of any single investee company. The Company will not enter into uncovered short positions.

If companies in the portfolio achieve organic growth or grow through corporate activity such as acquisitions, and consequently have a market capitalisation that would place them outside the investable universe (described above), the Investment Manager will not be obliged to sell those holdings, but the proportion of the portfolio in such companies will be carefully monitored by the Investment Manager and the Board so that the overall investment policy to invest in the smallest quoted or traded companies is not materially altered.

No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.

Performance

Details of the Company's performance are set out in the Highlights and the Chairman's Statement.

A review of developments during the year as well as information on investment activity within the Company's portfolio are included in the Investment Manager's Report.

Results and dividend

The results of the Company are set out in the statement of comprehensive income.

The total net loss for the year, after taxation was £10.3 million (2018: loss of £2.8 million), of which the revenue return amounted to 1.50p (2018: 0.03p) per share, and the capital return amounted to (19.97p) (2018: 6.22p) per share.

The Directors are recommending a final dividend of 1.25p per share.
Dividend policy

The Company will only pay dividends on the Ordinary Shares to the extent that it has sufficient financial resources available for the purpose in accordance with the Companies Act 2006. The Company has no stated dividend target.

Key Performance Indicators (KPIs)

A number of performance indicators are used to monitor and assess the Company's success in achieving its objectives and to measure its progress and performance.

The principal KPIs are described below:

- Performance against the Company's peers - while the principal objective is to achieve capital growth, the Board also monitors the performance relative to a broad range of competitor funds. The Company does not have a benchmark.

- Share price discount to NAV per share - the Board monitors the level of the Company's premium or discount to NAV closely. During the period 1 March 2018 to 28 February 2019, the shares traded between a premium of 6.8% and discount of 2.9% at an average premium of 1.4%.

- Share price movements - the Company's Ordinary Share price decreased by 22.0% over the period under review.

- Ongoing charges - the ongoing charges represent the Company's management fee and all other operating expenses excluding any finance costs, expressed as a percentage of the average daily net assets during the year. The ongoing charges for the year ended 28 February 2019 were 1.84% (2018: 1.48%).

Principal Risks

The Company is exposed to a variety of risks and uncertainties. The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its investment objective, business model, future performance, solvency or liquidity.

The Company maintains a risk matrix which sets out the key risks facing the Company and how they can be mitigated. The principle risks remain unchanged since last year and are set out in the following table with an explanation of how they are mitigated.

Risk

Mitigation

Investment performance

The investment objective of the Company may not be achieved as returns are reliant primarily upon the performance of the portfolio.

The Company is reliant on the Investment Manager's investment process. The Board has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on.

The Board monitors the implementation and results of the investment process with the Investment Manager. The Investment Manager attends all Board meetings and provides the Board with information including performance data, an explanation of stock selection decisions, portfolio exposure and the rationale for the portfolio composition.

The Company will invest primarily in the smallest UK quoted or traded companies, by market capitalisation. Smaller companies can be expected, in comparison to larger companies, to have less mature businesses, a more restricted depth of management and a higher risk profile.

The Investment Manager has significant experience in small cap investing and deploys an approach that is designed to maximise the potential for the investment objective to be achieved over the longer-term.

Operational

The Company relies on external service providers. In the event that they are unable, or unwilling, to perform in accordance with its terms of appointment the Company may impact the Company's performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company's financial position.

Due diligence is undertaken before contracts are executed with potential service providers.

The Board monitors the performance of service providers together with the associated costs. The Board also reviews reports on the effective operation of the internal controls of service providers.

The security of the Company's assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the control systems of the service providers.

The Company's assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody assets of an identical type or the corresponding amount must be returned unless the loss was beyond the reasonable control of the custodian.

The Board also considers the business continuity arrangements of the Company's key service providers.

The Board may terminate all key contracts on normal market terms.

Financial

The Company's investment activities expose it to a variety of financial risks that include interest rate, currency and liquidity risk.

Further details of these risks are disclosed in Note 14 to the financial statements together with a summary of the policies for managing these risks.

Legal and compliance

The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant conditions.

The Investment Manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the relevant provisions of the Corporation Tax Act 2010 are not breached. A report is provided to the Board at each meeting.

The Company is subject to the Companies Act 2006, the Alternative Investment Fund Manager's Directive, the UK Listing Rules and Disclosure & Transparency Rules and the Market abuse Regulations.

The Company Secretary and the Company's professional advisers provide reports to the Board in respect of compliance with all applicable rules and regulations and will ensure that the Board is made aware of any changes to these rules and regulations.

Compliance with the accounting rules affecting investment trusts is also monitored.

Brexit

The Board follows developments in the Brexit negotiations. The future relationship between the UK and the EU is not currently clear; markets may react differently to diverse outcomes. The situation is difficult to mitigate today, but the Investment Manager considers the range of risk for each investment and the Board continues to monitor events.

Viability statement

The Company is an investment trust with an objective of achieving long-term capital growth. Taking account of the Company's current position, the principal risks that it faces and their potential impact on its future development and prospects, the Directors have assessed the prospects of the Company, to the extent that they are able to do so, over the next five years. They have made that assessment by considering:

- the long-term nature of the Company's investment objectives and strategy;

- the Company's principal risks and uncertainties that are not expected to change materially;

- the Company's business model which should remain attractive for longer than the period to 28 February 2024;

- the relative stability of the Company's expenses and liabilities; and

- the outlook for the value of the Company's investment portfolio.

In determining the appropriate period of assessment the Directors had regard to their view that, given the Company's objective of achieving capital growth, shareholders should consider the Company as a long term investment proposition. This is consistent with the general view of financial advisers that investors should consider investing in equities for a minimum of five years. Accordingly, the Directors consider five years to be an appropriate time horizon over which to assess the Company's viability.

The Directors confirm that they have a reasonable expectation, on the assumption that the principal risks identified, are managed or mitigated effectively, that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of assessment.

Future prospects

The Board's main focus is the achievement of capital growth and an attractive compound return over the long term. The future of the Company is dependent upon the success of the Company's investment strategy. The outlook for the Company is discussed in both the Chairman's Statement and the Investment Manager's report.

Employees, social, community, human rights and environmental matters

The principal activity of the Company is to invest in accordance with the Investment Policy set out in the Strategy Report. The Company has no employees and all of its Directors are non-executive, the day-to-day activities being carried out by third parties. Therefore, there are no disclosures to be made in respect of employees, and accordingly it has no direct social, human rights or environmental impact from its operations. In carrying out its investment activities and relationships with suppliers the Company aims to conduct itself responsibly, ethically and fairly.

Board Diversity

When recruiting a new Director, the Board's policy is to appoint individuals on merit. The Board believes diversity is important in bringing an appropriate range of skills, knowledge and experience to the Board and gives that consideration when recruiting new Directors. As at 28 February 2019, there were three male Directors and one female Director on the Board.

The Chairman's statement together with the Investment Manager's Report and portfolio information form part of the Strategic Report.

The Strategic Report was approved by the Board on 2 May 2019.

For and on behalf of the Board

Hugh Aldous

Chairman

2 May 2019

Related Party Transactions

The Investment Manager is responsible for providing management services to the Company in accordance with the Company's investment policy and the terms of the management agreement dated 23 March 2017. The management fee is payable monthly in arrears and is one twelfth of 1% of the market capitalisation of the Company on the last business day of each month. Further details are provided in note 4. Downing LLP has agreed to rebate any management fee payable in order for the Company to maintain an ongoing charges ratio of 2% or lower. The Board believes that the current fee structure is appropriate for an investment company in this sector.

The Investment Management Agreement is for a minimum term of three years and is terminable by the Company, or the Investment Manager, providing not less than six months' written notice, such notice not to expire prior to the expiry of the three-year minimum term.

The Board currently consists of four non-executive Directors, all Directors are considered to be independent of the Investment Manager. None of the Directors has a service contract with the Company. For the year ended 28 February 2019, the Chairman received an annual fee of £35,000, the Chairman of the Audit Committee received an annual fee of £30,000 and each of the other Directors received an annual fee of £25,000.

Disclosures of the Directors' interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors' Remuneration Report of the Annual Report.

Statement of Directors' responsibilities in respect of the annual report and financial statements

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Company's financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for that period.

In preparing these financial statements the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- state whether IFRS as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

- prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company, and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for preparing the strategic report, directors' report, Directors' remuneration report, the corporate governance statement and the report of the Audit Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the listing Rules and the Disclosure and Transparency Rules.

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

Each of the Directors, confirms that, to the best of his knowledge:

- the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profits of the Company; and

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Hugh Aldous

Chairman

2 May 2019

Statement of Comprehensive Income
for the year ended 28 February 2019

	Year ended 28 February 2019			Period from 17 February 2017 to 28 February 2018
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital Total £'000 £'000
Losses on investments at fair value through profit or loss (note 9)	-	(10,725)	(10,725)	-	(2,447)	(2,447)
Investment income (note 3)	1,326	-	1,326	417	-	417
	1,326	(10,725)	(9,399)	417	(2,447)	(2,030)
Investment management fee (note 4)	(95)	(380)	(475)	(90)	(358)	(448)
Other expenses (note 5)	(395)	-	(395)	(339)	(1)	(340)
	(490)	(380)	(870)	(429)	(359)	(788)
Profit/(loss) before taxation	836	(11,105)	(10,269)	(12)	(2,806)	(2,818)
Taxation (note 7)	-	-	-	-	-	-
Profit/(loss) for the period	836	(11,105)	(10,269)	(12)	(2,806)	(2,818)
	Revenue (p)	Capital (p)	Total (p)	Revenue (p)	Capital (p)	Total (p)
Earnings/(loss) per Ordinary Share (note 6)	1.50	(19.97)	(18.47)	(0.03)	(6.22)	(6.25)

The total column of this statement represents the statement of comprehensive income of the Company prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies ('AIC').

The profit/(loss) for the period disclosed above represents the Company's total comprehensive income. The Company does not have any other comprehensive income.

All items in the above statement are those of a single entity and derive from continuing operations. No operations were acquired or discontinued during the period.

The notes form an integral part of these financial statements.

Statement of Changes in Equity

for the year ended 28 February 2019

Year ended 28 February 2019	Share capital £'000	Share premium account £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
At 28 February 2018	56	-	54,506	(2,806)	(12)	51,744
Profit/(loss) for the period	-	-	- (11,105)		836	(10,269)
Dividends paid (note 8)	-	-	-	-	-	-
At 28 February 2019	56	-	54,506	(13,911)	824	41,475

For the period 17 February 2017 to 28 February 2018
At 17 February 2017	-	-	-	-	-	-
Loss for the period	-	-	-	(2,806)	(12)	(2,818)
Issue of Management Shares	50	-	-	-	-	50
Redemption of Management Shares	(50)	-	-	-	-	(50)
Issue of Ordinary Shares	56	55,544	-	-	-	55,600
Expenses of share issue	-	(1,038)	-	-	-	(1,038)
Cancellation of share premium account	-	(54,506)	54,506	-	-	-
Dividends paid (note 8)	-	-	-	-	-	-
At 28 February 2018	56	-	54,506	(2,806)	(12)	51,744

The notes form an integral part of these financial statements.

Statement of Financial Position

as at 28 February 2019

	28 February 2019 £'000	28 February 2018 £'000
Non-current assets
Investments held at fair value through profit or loss (note 9)	35,326	32,861
	35,326	32,861
Current assets
Trade and other receivables (note 10)	740	114
Cash and cash equivalents	5,504	20,704
	6,244	20,818
Total assets	41,570	53,679
Current liabilities
Trade and other payables (note 11)	(95)	(1,935)
	(95)	(1,935)
Total assets less current liabilities	41,475	51,744
Net Assets	41,475	51,744
Represented by:
Share capital (note 13)	56	56
Special reserve	54,506	54,506
Capital reserve	(13,911)	(2,806)
Revenue reserve	824	(12)
Equity shareholders' funds	41,475	51,744
Net asset value per Ordinary Share (note 13)	74.59p	93.06p

The financial statements were approved by the Board on 2 May 2019 and were signed on its behalf by:

Hugh Aldous

Chairman

Downing Strategic Micro-Cap Investment Trust PLC

Registered in England and Wales, no. 10626295

The notes form an integral part of these financial statements.

Statement of Cash Flow

for the year ended 28 February 2019

	Year ended 28 February 2019 £'000	Period from 17 February 2017 to 28 February 2018 £'000
Operating activities
Loss before taxation	(10,269)	(2,818)
Losses on investments at fair value through profit or loss	10,725	2,447
Increase in other receivables	(626)	(114)
(Decrease)/increase in other payables	(24)	119
Purchases of investments	(15,006)	(33,492)
Sales of investments	-	-
Net cash outflow from operating activities	(15,200)	(33,858)
Financing activities
Issue of Ordinary shares	-	55,600
Expenses of Ordinary share issue	-	(1,038)
Issue of Management Shares	-	50
Cancellation of Management Shares	-	(50)
Dividends paid	-	-
Net cash inflow from financing activities	-	54,562
Change in cash and cash equivalents	(15,200)	20,704
Cash and cash equivalents at start of period	20,704	-
Cash and cash equivalents at end of period	5,504	20,704
Comprise of:
Cash and cash equivalents	5,504	20,704

The notes form an integral part of these financial statements.

Notes to the Financial Statements

for the year ended 28 February 2019

1. General information

Downing Strategic Micro-Cap Investment Trust PLC (the Company) was incorporated in England and Wales on 17 February 2017 with registered number 10626295, as a closed-end investment company.

The Company commenced its operations on 9 May 2017. The Company intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

2. Accounting policies

The principal accounting policies followed by the company are set out below:
Basis of accounting

The annual financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. These comprise standards and interpretations approved by the International Accounting Standards Board (IASB), together with interpretations of the International Accounting Standards' and Standing Interpretations Committee (IASC) that remain in effect, and to the extent that they have been adopted by the European Union.

These financial statements are presented in Sterling (£) rounded to the nearest thousand. Where presentational guidance set out in the statement of recommended practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (SORP), issued by the Association of Investment Companies ('AIC') issued in November 2014 and updated in February 2018 with consequential amendments is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP.

Going concern

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for the foreseeable future, being a period of 12 months from the date these financial statements were approved. Furthermore, the Directors' are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Company's financial position in respect of its cash flows and investment commitments. Therefore, the financial statements have been prepared on the going concern basis.

Presentation of statement of comprehensive income

In order to better reflect the activities of an investment trust and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of revenue and capital nature has been presented alongside the income statement. The net revenue is the measure the Directors believe is appropriate in assessing the Company's compliance with certain requirements set out in the Investment Trust (Approved Company) (Tax) Regulations 2011.

Accounting developments

The following amendments to standards effective this year, being relevant and applicable to the Company, have been adopted, although they have no impact on the financial statements:

- IFRS 7 Financial Instruments: disclosures for initial application of IFRS 9 - effective 1 January 2016 or when IFRS 9 is first applied

- IFRS 9 Financial Instruments - effective 1 January 2018

- IFRS 15 Revenue from Contracts with Customers - effective 1 January 2018

The revised IFRS 9 Financial Instruments replaces IAS 39 and applies to the classification and measurement and impairment of financial assets and liabilities, and hedge accounting. Please see note 16 for further details.

The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial year end. The Directors have concluded that there is no impact from this accounting standard on the financial statements.

International Financial Reporting Standards
- IFRS 16 Leases - effective 1 January 2019

Critical accounting judgements and uses of estimation

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the amounts reported in the balance sheet and the income statement. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. There were no significant accounting estimates or significant judgements in the current period, except the valuation of the loan notes of Real Good Food as explained in note 14.

Investments held at fair value

All investments held by the Company are classified at 'fair value through profit or loss'. Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments recognised in the statement of comprehensive income and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost.

For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

When a purchase or sale is made under a contract, the terms of which require delivery within the time frame of the relevant market, the investments concerned are recognised or derecognised on the trade date.

Unquoted investments are valued by the Directors at the balance sheet date based on recognised valuation methodologies, in accordance with International Private Equity and Venture Capital Valuation (IPEVC) Guidelines issued in December 2015 such as dealing prices or third-party valuations where available, net asset values and other information as appropriate.

All investments for which fair value is measured or disclosed in the financial statements will be categorised within the fair value hierarchy in the notes of the financial statements, described as follows, based on the lowest significant applicable input:

- Level 1 reflects financial instruments quoted in an active market.

- Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

- Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer.

Income

Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established.

Special dividends will be taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Company will review all relevant information as to the reasons for the sources of the dividend on a case by case basis.

When the Company elects to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend will be recognised in the capital column.

Other investment income and interest receivable are included in the financial statements on an effective interest rate basis.

Expenses

All expenses are accounted for on an effective interest rate basis. All expenses are charged through the revenue account in the statement of comprehensive income except as follows:

- expenses which are incidental to the acquisition and disposal of an investment which are charged to capital. Details of transaction costs are given in note 9.

All other expenses are allocated to revenue with the exception of 80% of the Investment Manager's fee which is allocated to capital. This is in line with the Board's expected long-term split of returns from the investment portfolio in the form of income and capital gains respectively.

Taxation

The charge for taxation is based on net revenue for the year. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Investment Trusts which have approval under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains. Any tax relief obtained in respect of investment management fees and other capital expenses charged or allocated to the capital column of the statement of comprehensive income is reflected in the capital reserve and a corresponding amount is charged against the revenue column of the statement of comprehensive income. The tax relief is the amount by which corporation tax payable is reduced as a result of these capital expenses.

Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

Share issue costs

Share issue costs relating to Ordinary Shares issued by the Company are charged to the share premium account.

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company only invests in companies quoted in the UK.

Capital reserve

Capital reserve includes:

- gains and losses on the disposal of investments;

- exchange difference of a capital nature;

- expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies; and

- increase and decrease in the valuation of investments held at period end.
This reserve is distributable.

Revenue reserve

This reserve includes net revenue recognised in the revenue column of the statement of comprehensive income. This reserve is distributable.

Special reserve

The Company cancelled its share premium account following a court order issued on 12 July 2017. As a result, a distributable special reserve was created. This reserve is distributable.

Dividends payable to shareholders

Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the statement of changes in equity. Dividends declared and approved by the Company after the balance sheet date have not been recognised as a liability of the Company at the balance sheet date.

3. Income

	Year ended 28 February 2019 £'000	Period from 17 February 2017 to 28 February 2018 £'000
Income from listed investments
UK dividend income	633	173
UK fixed interest income	693	244
Total	1,326	417

4. Investment management fee

In respect of its services provided under the Management Agreement, the Investment Manager is entitled to receive a management fee payable monthly in arrears calculated at the rate of one twelfth of 1% of the market capitalisation as at the relevant calculation date.

The Investment Manager has agreed that, for so long as it remains the Company's Investment Manager, it will rebate such part of any management fee payable to it so as to help the Company maintain an ongoing charges ratio of 2% or lower.

At 28 February 2019, an amount of £33,824 (2018: £43,368) was outstanding and due to Downing LLP in respect of Management fees.

	Year ended 28 February 2019 £'000	Period from 17 February 2017 to 28 February 2018 £'000
Investment management fee
Revenue	95	90
Capital	380	358
Total	475	448

5. Other expenses

	Year ended 28 February 2019 £'000	Period from 17 February 2017 to 28 February 2018 £'000
Administration and secretarial fees	79	66
Auditor's remuneration¹:
- audit services	37	30
Directors' fees	110	96
Safe custody fees	3	22
Legal fees	5	30
Sundry fees	156	90
Taxation services	5	5
Revenue expenses	395	339
Capital expenses	-	1
Total expenses	395	340

¹fee payable to the auditor for the audit of the Company's financial statements for the year ended 28 February 2019. Inclusive of VAT at 20%. During the year there were no non-audit service fees payable to the auditor (2018: £17,500).

6. Earnings/(loss) per Ordinary Share

	Year ended 28 February 2019			Period from 17 February 2017 to 28 February 2018
	Net return	Per share	Net return	Per share
	£'000	pence	£'000	Pence
Revenue Return	836	1.50	(12)	(0.03)
Capital return:	(11,105)	(19.97)	(2,806)	(6.22)
Total return	(10,269)	(18.47)	(2,818)	(6.25)
Weighted average number of Ordinary Shares		55,600,002		45,089,319

7. Taxation

	Year ended				Period from
	28 February 2019			17 February 2017 to 28 February 2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
UK corporation tax at 19% (2018: 19.22%)	-	-	-	-	-	-

The current taxation charge for the period differs from the standard rate of corporation tax in the UK of 19% (2018: 19.22%). The differences are explained below:

	Year ended 28 February 2019			Period from 17 February 2017 to 28 February 2018
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Loss before taxation	836	(11,105)	(10,269)	(12)	(2,806)	(2,818)
Theoretical tax at UK corporation tax rate of 19% (2018: 19.22%)	159	(2,110)	(1,951)	(2)	(539)	(541)
Effects of:
UK dividends not taxable	(120)	-	(120)	(33)	-	(33)
Capital items not taxable	-	2,038	2,038	-	470	470
Excess expenses in the period	(39)	72	33	35	69	104
Actual current tax charge	-	-	-	-	-	-

The Company has unrealised expenses of £341,000 (2018: £543,000). It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses, therefore no provision for any deferred tax asset has been made in the current year. The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust.

8. Dividends

Amounts recognised as distributions in the year:

		Period from
	Year ended	17 February 2017 to
	28 February 2019	28 February 2018
	£'000	£'000
Dividends paid during the year	-	-

It is proposed that a final dividend of 1.25p per share will be paid in respect of the year ended 28 February 2019.

9. Investments

	Year ended 28 February 2019 £'000	Period from 17 February 2017 to 28 February 2018 £'000
Opening book cost	35,308	-
Opening investment holding losses	(2,447)	-
Opening valuation	32,861	-
Movements in the period
Purchases at cost	13,190	35,308
Disposals:
Proceeds	-	-
Net realised losses on disposals	-	-
Movement in investment holding losses	(10,725)	(2,447)
Closing valuation	35,326	32,861

Closing book cost	48,498	35,308
Closing investment holding losses	(13,172)	(2,447)
	35,326	32,861

Realised gains on disposals	-	-
Movement in investment holding losses	(10,725)	(2,447)
	(10,725)	(2,447)

During the period the Company incurred transaction costs of £3,077 (2018: £44,330) and nil (2018: nil) on purchases and sales respectively. These amounts are included in losses on investments, as disclosed in the statement of comprehensive income.

10. Trade and other receivables

	28 February 2019 £'000	28 February 2018 £'000
Dividends receivable	724	109
Prepayment and other debtors	16	5
	740	114

11. Trade and other payables

	28 February 2019 £'000	28 February 2018 £'000
Amount due to brokers	-	1,816
Other creditors	95	119
	95	1,935

12. Called-up share capital

	28 February 2019	28 February 2018
	£'000	£'000
At beginning of period	56	-
Issue of ordinary shares	-	56
At end of period	56	56

The Company was incorporated on 17 February 2017 with an issued share capital of £50,002 represented by 50,000 Management shares of £1.00 each and 2 Ordinary shares of £0.001. These Management shares were redeemed immediately following admission of the Ordinary shares on the 9 May 2017 out of the proceeds of this issue.

On 9 May 2017, the Company issued 55,600,000 Ordinary £0.001 shares at £1 per share in a placing, offer for subscription and intermediaries offer, raising £54.5 million after expenses.

As at 28 February 2019 there were 55,600,002 (2018: 55,600,002) Ordinary shares in issue.

13. Net Asset Value per Ordinary Share

NAV per Ordinary Share is based on net assets at the period end and 55,600,002 (2018: 55,600,002) Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

	28 February 2019		28 February 2018
	NAV Per share Pence	NAV Attributable £'000	NAV Per share Pence	NAV Attributable £'000
Ordinary Shares:
Basic and diluted	74.59	41,475	93.06	51,744

14. Analysis of financial assets and liabilities

Investment Objective and Policy

The Company's Investment Objective and Investment Policy are detailed on the inside front cover of the Annual Report and in the Strategic Report. The Company's investing activities in pursuit of its Investment Objective involve certain inherent risks. The Company's financial instruments can comprise:

- shares and debt securities held in accordance with the Company's Investment Objective and investment policies;

- derivative instruments for efficient portfolio management, gearing and investment purposes; and

- cash, liquid resources and short-term receivables and payables that arise from its operations.

The risks identified arising from the Company's financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency exposure risk), liquidity risk and credit and counterparty risk. The Company may enter into derivative contracts to manage risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk

Market risk arises from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager.

Market price risk

Market price risk (i.e changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The Board manages the risks inherent to the investment portfolio by ensuring full and timely reporting of relevant information from the Investment Manager.

Investment performance and exposure are reviewed at each Board meeting.

The Company's exposure to changes in market prices as at 28 February 2019 on its equity investments held at fair value through profit or loss was £35,326,000 (2018: £32,861,000).

A 10% increase in the fair value of its investments at 28 February 2019 would have increased net assets attributable to shareholders by £3,533,000 (2018: £3,286,000). An equal change in the opposite direction would have decreased the net assets and net profit available to shareholders by an equal and opposite amount. The analysis is based on closing balances only and is not representative of the period as a whole.

Fair value of loan notes of Real Good Food was calculated by discounting the expected future cash flows using the original effective interest being 10% and 12%. If these rates were increased by 2%, the fair value would have reduced by £258,937 (2018: £206,502). As a result, net assets attributable to shareholders would decline by the same amount. An equal change in the opposite direction would have increased the net assets attributable to shareholders by an equal and opposite amount.

Fair value of loan notes of Redhall was calculated by discounting the expected future cash flows using the original effective interest being 12.5%. If this rate was increased by 2%, the fair value would have reduced by £12,227 (2018: nil). As a result, net assets attributable to shareholders would decline by the same amount. An equal change in the opposite direction would have increased the net assets attributable to shareholders by an equal and opposite amount.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits. The Company does not currently receive interest on its cash deposits.

The Company's financial assets may include investment in fixed interest securities, such as UK Corporate debt stock, whose fair value may be affected by movements in interest rates. The majority of the Company's financial assets and liabilities, however, are non-interest bearing. As a result, the Company's financial assets and liabilities are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. There was no exposure to interest bearing liabilities during the period ended 28 February 2019 (2018: none).

The possible effects on the fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions.

The interest rate profile of the Company was as follows:

	28 February 2019	28 February 2018
	£'000	£'000
Real Good Food loan notes	7,209	5,749
Redhall loan notes	700	-

The exposure, at 28 February 2019, of financial assets and liabilities to interest rate risk is shown by reference to:

- floating interest rates - when the rate is due to re-set; and
- fixed interest rates - when the financial instrument is due for repayment.

	2019	2019		2018	2018
	in one	in two to	2019	in one	in two to	2018
	year	three years	total	year	three years	total
	£'000	£'000	£'000	£'000	£'000	£'000
Exposure to fixed interest rates:
Unquoted loan notes	700	7,209	7,909	170	5,579	5,749
Total	700	7,209	7,909	170	5,579	5,749

Foreign currency risk

All the Company's assets are denominated in Sterling and accordingly the only currency exposure the Company has is through the trading activities of its investee companies.

Liquidity risk

Liquidity risk is not significant as the Company is a closed-end investment trust and the majority of the Company's assets are investments in quoted equities and other quoted securities that are readily realisable.

Credit and counterparty risk

Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.

Credit risk arises from two main sources. Firstly, the possibility that the issuer of a security will be unable to pay interest and principal in a timely manner. Secondly, there is the possibility of default of the issuer. Adhering to investment guidelines and avoiding excessive exposure to one particular issuer or scheme can limit credit risk.

The maximum exposure to credit risk as at 28 February 2019 was £14,137,000 (2018: £26,562,000). The calculation is based on the Company's credit risk exposure as at 28 February 2019 and this may not be representative for the whole period.

	28 February 2019 £'000	28 February 2018 £'000
Dividends	724	109
Cash and cash equivalents	5,504	20,704
Unquoted loan notes	7,909	5,749
Total	14,137	26,562

The Company's quoted investments are held on its behalf by The Northern Trust Company, acting as the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal controls report.

Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. None of the Company's assets are past due or impaired.

15. Fair Value Hierarchy

Financial assets and financial liabilities of the Company are carried in the statement of financial position at their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in a current transaction between market participants, other than a forced or liquidation sale. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices and Stock Exchange Electronic Trading Services (SETS) at last trade price at the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

The Company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in Level 1, if they reflect actual and regularly occurring market transactions on an arm's length basis.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 2 inputs include the following:

- quoted prices for similar (i.e. not identical) assets in active markets;

- quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current;

- inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals); and

- inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).

Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

28 February 2019	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Quoted on the Main Market	1,889	-	-	1,889
Traded on AIM	25,528	-	-	25,528
Unquoted Loan Notes	-	-	7,909	7,909
	27,417	-	7,909	35,326
28 February 2018	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Quoted on the Main Market	2,370	-	-	2,370
Traded on AIM	24,742	-	-	24,742
Unquoted Loan Notes	-	-	5,749	5,749
	27,112	-	5,749	32,861

There were no transfers between level 1 and levels 2 during the period. A reconciliation of fair value measurements in level 3 is set out in the following table.

	28 February 2019	28 February 2018
	£'000	£'000
Opening balance	5,749	-
Purchases	2,160	5,749
Sales	-	-
Total gains or losses included in losses on investments in the statement of comprehensive income:
- on assets sold	-	-
- on assets held at period end	-	-
Closing balance	7,909	5,749

16. Transition to IFRS 9 Financial Instruments

IFRS 9 'Financial Instruments' is effective for periods beginning on or after 1 January 2018 and has been adopted by the Company in the year. IFRS 9 sets out requirements for recognising and measuring financial assets and financial liabilities and replaces IAS 39 'Financial Instruments: Recognition and Measurement'. The impact on the consolidated financial statements of the Company is detailed below.

Classification of financial assets

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and the cash flow characteristics of the assets.

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income and fair value through profit or loss. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. The new classification requirements do impact the accounting for the Company's financial assets.

Impairment of financial assets

IFRS 9 replaces the incurred loss model in IAS 39 with a forward-looking 'expected credit loss' model. The new impairment model will apply to financial assets measured at amortised cost. There is no impact on the values reported in the financial statements from adopting IFRS 9 in respect of expected credit losses.

Cash and cash equivalents

Cash and cash equivalents are held at banks with a strong credit rating and are not subject to any period of notice. The Company typically maintains a low value of cash and cash equivalents. There is no impact on the values reported in the financial statements from adopting IFRS 9 in respect of expected credit losses.

Classification of financial liabilities

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. The classification requirements of IFRS 9 do not impact the financial statements.

17. Capital management

The Company's capital is as disclosed in the statement of financial position and is managed on a basis consistent with its investment objective and policies, as set out on the inside front cover of the Annual Report and in the Strategic Report. The principal risks and their management are disclosed in the Strategic Report.

18. Significant Interests

As at 28 February 2019 the Company held interests amounting to 3% or more of the equity the following investee companies.

	% of investee company
AdEPT Technology Group plc	4.8
Braemar Shipping Services plc	3.4
FireAngel Safety Technology plc	3.7
Gama Aviation plc	3.5
Hargreaves Services plc	3.3
Ramsdens Holdings plc	5.1
Real Good Food Company plc	5.3
Redhall Group plc	13.5
Synectics plc	10.8
Volex plc	4.3

19. Related parties and Investment Manager

Investment Manager

Downing LLP have been appointed as the Investment Manager to the Company. The relationship is governed by an agreement dated 23 March 2017.

The total investment management fee charged by Downing LLP for the period ended 28 February 2019 was £475,195 (2018: £447,993). The amount outstanding at 28 February 2019 was £33,824 (2018: £43,368).

During the year under review, Judith MacKenzie was a Non-Executive Director of Real Good Food plc in which the Company has an investment. An annual fee of £25,000 is paid to Downing LLP for Judith's services as a director of Real Good Food plc.

Directors

Disclosure of the Directors' interests in the Ordinary Shares of the Company and fees and expenses payable to the Directors are set out in the Directors' Remuneration Report in the Annual Report. At 28 February 2019, there were no outstanding Directors' fees (2018: none).

20. Contingent liabilities

There were no contingent liabilities at 28 February 2019 (2018: none).

21. Post balance sheet events

Share repurchases

Since the year end the Company has completed the following transactions in its own shares:

Shares bought back and placed in treasury:

Date of repurchase	Number of Ordinary shares repurchased	Gross Consideration (£)
18 April 2019	100,000	71,108
24 April 2019	100,000	71,108
26 April 2019	50,000	35,554
Total	250,000	178,390

Directors' interests in shares

Hugh Aldous purchased 15,000 ordinary shares on 29 March 2019, subsequent to the year-end. Following which he held 175,000 shares including 19,791 shares held by Mrs Aldous.

ENDS

Enquiries:

Daniel Harris 020 7601 6137

Shore Capital

Kerry Higgins/George Bayer 01245 398950

Maitland Administration Services Limited

[1] See Manager's Report for definition

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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