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Interim report

23 NOVEMBER 2022

 

NORTHERN 3 VCT PLC

 

UNAUDITED INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022

 

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

 

Financial highlights (comparative figures as at 30 September 2021 and 31 March 2022)

 







Six months ended
30 September
                2022

Six months ended
30 September
                2021



Year ended
31 March
               2022

Net assets

£115.3m

£116.8m

£106.9m

Net asset value per share

92.0p

106.1p

97.9p

Return per share:
Revenue
Capital
Total


(0.2)p
(2.9)p
(3.1)p


0.3p
5.8p
6.1p


0.4p
(0.5)p
(0.1)p

Dividend declared
in respect of the period


2.0p


2.0p


5.0p

Cumulative return to shareholders
since launch:
Net asset value per share
Dividends paid per share*
Net asset value plus dividends paid per share



92.0p
111.4p
203.4p



106.1p
106.4p
212.5p



97.9p
108.4p
206.3p

Mid-market share price at end of period

88.5p

97.5p

94.5p

Share price discount to net asset value

3.8%

8.1%

3.5%

Tax-free dividend yield (based on the net asset value per share)**

Excluding special dividend

Including special dividend





4.7%

N/A





4.8%

9.6%





4.7%

N/A

 

*Excluding interim dividend not yet paid

**The annualised dividend yield is calculated by dividing the dividends in respect of the 12 month period ended on each reference date by the net asset value per share at the start of the period.

Enquiries:

James Sly / Sarah Williams, Mercia Asset Management PLC – 0330 223 1430

Website: www.mercia.co.uk/vcts


 

INTERIM MANAGEMENT REPORT TO SHAREHOLDERS

For the six months ended 30 September 2022

 

Over the last six months, inflationary pressures and political turmoil have caused volatility in financial markets. Despite this, your company has continued to invest in early stage companies and to support existing portfolio companies while generating returns from realisations.

 

The proceeds of portfolio investments sold during the period totalled £6.5 million, 3.1 times the initial cost invested of £2.1 million. Investment activity increased in the period, with £4.5 million invested across 10 investee companies. The cash generated from investment disposals, in combination with the proceeds from the 2021/22 £17.0 million public share offer, has resulted in your company being well positioned to pursue new opportunities to support small and medium businesses and to work with existing portfolio companies to finance their growth plans.

 

Results and dividend

The unaudited net asset value (NAV) per share on 30 September 2022 was 92.0 pence (97.9 pence (audited) on 31 March 2022) and is stated after deducting the final dividend of 3.0 pence per share in respect of the 2021/22 financial year, which was paid in August 2022. The return per share as shown in the income statement for the six months ended 30 September 2022 was minus 3.1 pence, compared with 6.1 pence in the corresponding period last year.

 

Investment income fell to £274,000 from £898,000 during the same period last year, reflecting the disposal of some income-yielding investments as we continue to move towards earlier stage venture capital arrangements, following the 2015 change to the definition of VCT qualifying assets.

 

The board has declared an unchanged interim dividend for the year ending 31 March 2023 of 2.0 pence per share, which will be paid on 13 January 2023 to shareholders who are on the register on 9 December 2022. It remains our objective to pay a dividend at least equivalent to 4.5% of the opening NAV in each year.

 

Investment portfolio

The prevailing macroeconomic conditions have been challenging for a number of our portfolio companies, with valuations in some sectors being reduced on the prospect of lower consumer spending. Your directors are careful when considering the valuations of the unquoted venture portfolio and valuations have been updated to reflect current market conditions.

 

Over the course of 2022 quoted markets have reacted to economic uncertainty by falling from the highs seen in 2021. The quoted portfolio ended the 6 month period £3.3 million lower than March 2022 (a 17% fall), although this was predominantly due to a fall in the value of musicMagpie plc, which fell by £1.4 million. Even at this lower value, the combined realised and unrealised return on cost from our investment in musicMagpie plc was still 6.6 times as at 30 September 2022.

 

We have continued to see positive realisations from portfolio companies. We have sold our holding in a recent early stage investment, Knowledgemotion, for initial net proceeds of £3.0 million, representing 1.7 times return on the original cost, and one of our listed holdings, Ideagen, for net proceeds of £3.4 million, representing 9.7 times return on cost.

 

Shareholder issues

As a result of the public share offer launched in January 2022, 16,700,963 new ordinary shares were issued in April 2022. Our dividend investment scheme, which enables shareholders to invest their dividends in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate, with around 12% of total dividends reinvested by shareholders during the year.

 

We are experiencing a sustained demand for long-term growth capital for smaller companies in the UK. In order to continue to support our existing portfolio through challenging economic conditions and invest in new early stage opportunities, we announce our intention to fundraise in the 2022/23 and 2023/24 tax years in conjunction with the other Northern VCTs. Full details of how to participate in the up to £6 million 2022/23 fund raise will be published in January 2023.

 

We have maintained our policy of being willing to buy back the company’s shares in the market when necessary in order to maintain liquidity, at a 5% discount to NAV. During the period, a total of 1,035,434 shares were repurchased for cancellation, equivalent to approximately 0.9% of the opening share capital.

 

VCT qualifying status and legislation

The company has continued to meet the stringent qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Our investment manager monitors the position closely and reports regularly to the board. Philip Hare & Associates LLP has continued to act as independent adviser to the company on VCT taxation matters.

 

We welcomed the UK Government’s announcement of its commitment to the extension of the VCT sunset clause beyond the existing 2025 deadline. The ‘sunset clause’ was a European state aid requirement when the VCT scheme received state aid approval in 2015, requiring a small change in UK legislation to enable VCT investors to continue to receive upfront tax relief after April 2025. The Board considers that the company is successfully delivering against the government’s mandate, which is to channel money into higher-risk, early-stage businesses. Mercia is represented on the relevant committees of the various trade bodies which are working to continue to demonstrate to government the positive contributions that VCTs play in society.

 

Outlook

Despite the obvious economic and political difficulties, your directors remain encouraged by the resilience of the portfolio. Your company is invested in a diversified portfolio of businesses with medium-term prospects in which we continue to remain confident, and there is an encouraging flow of new investment opportunities.

 

On behalf of the Board

 

James Ferguson

Chairman

 


 

INVESTMENT PORTFOLIO SUMMARY

as at 30 September 2022

 

 

Cost

£000

Valuation

£000

% of net assets

by value

Fifteen largest venture capital investments:

 

 

 

Evotix (formerly SHE)

2,487

8,642

7.5

Lineup Systems

974

7,263

6.3

Volumatic Holdings

216

3,360

2.9

Grip-UK (t/a Climbing Hangar)

3,174

3,174

2.8

IDOX*

530

2,833

2.5

Newcells Biotech

2,229

2,533

2.2

Clarilis

1,772

1,862

1.6

Biological Preparations Group

1,915

1,832

1.6

Rockar

1,613

1,813

1.6

Tutora (t/a Tutorful)

1,813

1,705

1.5

Netacea

1,411

1,580

1.4

Enate

1,373

1,572

1.4

Project Glow Topco (t/a Currentbody.com)

1,519

1,519

1.3

Gentronix

805

1,490

1.3

Broker Insights

1,366

1,365

1.2

 

----------

----------

-------

Fifteen largest venture capital investments

23,197

42,543

37.1

Other venture capital investments

40,640

27,143

23.3

 

----------

----------

-------

Total venture capital investments

63,837

69,686

60.4

Listed equity investments

10,188

10,598

9.2

 

----------

----------

-------

Total fixed asset investments

74,025

80,284

69.6

 

----------

 

 

Net current assets

 

35,011

30.4

 

 

----------

-------

Net assets

 

115,295

100.0

 

 

----------

-------

*Quoted on AIM

 

 

 

 

 


 

Extracts from the unaudited interim financial statements for the six months ended 30 September 2022 are set out below.

 

 

INCOME STATEMENT

(unaudited) for the six months ended 30 September 2022

 

 

Six months ended

30 September 2022

Six months ended

30 September 2021

 

Revenue 

£000 

Capital 

£000 

Total 

£000 

Revenue 

£000

Capital 

£000 

Total 

£000 

Gain on disposal of investments

-

503

503

-

1,180

1,180

Movements in fair value of investments

-

(3,411)

(3,411)

-

5,936

5,936

 

----------

----------

----------

----------

----------

----------

 

-

(2,908)

(2,908)

-

7,116

7,116

Income

274

-

274

898

-

898

Investment management fee

(256)

(769)

(1,025)

(282)

(846)

(1,128)

Other expenses

(226)

-

(226)

(210)

-

(210)

 

----------

----------

----------

----------

----------

----------

Return before tax

(208)

(3,677)

(3,885)

406

6,270

6,676

Tax on return

-

-

-

(27)

27

-

 

----------

----------

----------

----------

----------

----------

Return after tax

(208)

(3,677)

(3,885)

379

6,297

6,676

 

----------

----------

----------

----------

----------

----------

Return per share

(0.2)p

(2.9)p

(3.1)p

0.3p

5.8p

6.1p

 

 

 

 

 

 

 

 

 

 

Year ended 31 March 2022

 

 

 

 

Revenue 

£000 

Capital 

£000 

Total 

£000 

Gain on disposal of investments

 

 

 

-

3,963

3,963

Movements in fair value of investments

 

 

 

-

(2,860)

(2,860)

 

 

 

 

----------

----------

----------

 

 

 

 

-

1,103

1,103

Income

 

 

 

1,438

-

1,438

Investment management fee

 

 

 

(563)

(1,690)

(2,253)

Other expenses

 

 

 

(407)

-

(407)

 

 

 

 

----------

----------

----------

Return before tax

 

 

 

468

(587)

(119)

Tax on return

 

 

 

(1)

1

-

 

 

 

 

----------

----------

----------

Return after tax

 

 

 

467

(586)

(119)

 

 

 

 

----------

----------

----------

Return per share

 

 

 

0.4p

(0.5)p

(0.1)p

 

 

 

 

 

 

 

 


 

BALANCE SHEET

(unaudited) as at 30 September 2022

 

 

30 September 2022 

£000 

30 September 2021 

£000 

31 March 2022 

£000 

 

 

 

 

Fixed asset investments

80,284

95,261

85,269

 

----------

----------

----------

Current assets:

 

 

 

Debtors

73

289

60

Cash and cash equivalents

35,026

21,389

21,683

 

----------

----------

----------

 

35,099

21,678

21,743

Creditors (amounts falling due

 

 

 

within one year)

(88)

(120)

(152)

 

----------

----------

----------

Net current assets

35,011

21,558

21,591

 

----------

----------

----------

 

 

 

 

Net assets

115,295

116,819

106,860

 

----------

----------

----------

Capital and reserves:

 

 

 

Called-up equity share capital

6,258

5,504

5,456

Share premium

37,077

20,658

20,909

Capital redemption reserve

653

539

602

Capital reserve

64,498

62,866

64,849

Revaluation reserve

6,259

25,408

13,659

Revenue reserve

550

1,844

1,385

 

----------

----------

----------

Total equity shareholders’ funds

115,295

116,819

106,860

 

----------

----------

----------

Net asset value per share

92.0p

106.1p

97.9p

 


 

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2022

 

 

-----------------Non-distributable reserves-----------------

Distributable reserves

Total 

 

Called up share 

capital 



Share 

premium 

Capital 

redemption 

reserve 



Revaluation

reserve* 



Capital 

reserve 



Revenue 

reserve 

 

 

£000 

£000 

£000 

£000 

£000 

£000 

£000 

At 1 April 2022

5,456

20,909

602

13,659

64,849

1,385

106,860

Return after tax

-

-

-

(7,400)

3,723

(208)

(3,885)

Dividends paid

-

-

-

-

(3,133)

(627)

(3,760)

Net proceeds of share issues

853

16,168

-

-

-

-

17,021

Shares purchased for cancellation



(51)



-



51



-



(941)



-



(941)

 

----------

----------

----------

----------

----------

----------

---------

At 30 September 2022

6,258

37,077

653

6,259

64,498

550

115,295

 

---------

----------

----------

----------

----------

----------

---------

 

STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 September 2021

 

 

-----------------Non-distributable reserves-----------------

Distributable reserves

Total 

 

Called up share 

capital 



Share 

premium 

Capital 

redemption 

reserve 



Revaluation 

reserve* 



Capital 

reserve 



Revenue 

reserve 

 

 

£000 

£000 

£000 

£000 

£000 

£000 

£000 

At 1 April 2021

5,492

19,716

502

26,105

64,263

1,465

117,543

Return after tax

-

-

-

(697)

6,994

379

6,676

Dividends paid

-

-

-

-

(7,655)

-

(7,655)

Net proceeds of share issues

49

942

-

-

-

-

991

Shares purchased for cancellation



(37)



-



37



-



(736)



-



(736)

 

----------

----------

----------

----------

----------

----------

---------

At 30 September 2021

5,504

20,658

539

25,408

62,866

1,844

116,819

 

----------

----------

----------

----------

----------

----------

---------

 

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2022

 

-----------------Non-distributable reserves-----------------

Distributable reserves

Total 

 

Called up share 

capital 



Share 

premium 

Capital 

redemption 

reserve 



Revaluation

reserve* 



Capital 

reserve 



Revenue 

reserve 

 

 

£000 

£000 

£000 

£000 

£000 

£000 

£000 

At 1 April 2021

5,492

19,716

502

26,105

64,263

1,465

117,543

Return after tax

-

-

-

(12,446)

11,860

467

(119)

Dividends paid

-

-

-

-

(9,302)

(547)

(9,849)

Net proceeds of share issues

64

1,193

-

-

-

-

1,257

Shares purchased

 

 

 

 

 

 

 

for cancellation

(100)

-

100

-

(1,972)

-

(1,972)

 

----------

----------

----------

----------

----------

----------

----------

At 31 March 2022

5,456

20,909

602

13,659

64,849

1,385

106,860

 

----------

----------

----------

----------

----------

----------

----------

 

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

STATEMENT OF CASH FLOWS

(unaudited) for the six months ended 30 September 2022

 

 

Six months ended 

Six months ended 

Year ended 

 

30 September 2022 

30 September 2021

31 March 2022

 

£000 

£000 

£000 

Cash flows from operating activities:

 

 

 

Return before tax

(3,885)

6,676

(119)

Adjustments for:

 

 

 

Gain on disposal of investments

(503)

(1,180)

(3,963)

Movement in fair value of investments

3,411

(5,936)

2,860

Decrease/(increase) in debtors

(13)

1,340

1,570

(Decrease)/increase in creditors

(64)

(1,665)

(1,633)

 

----------

----------

----------

Net cash outflow from operating activities

(1,054)

(765)

(1,285)

 

----------

----------

----------

Cash flows from investing activities:

 

 

 

Purchase of investments

(5,379)

(7,178)

(15,360)

Sale/repayment of investments

7,456

13,335

25,495

 

----------

----------

----------

Net cash inflow/(outflow) from investing activities

2,077

6,157

10,135

 

----------

----------

----------

Cash flows from financing activities:

 

 

 

Issue of ordinary shares

17,037

1,000

1,298

Share issue expenses

(16)

(7)

(41)

Purchase of ordinary shares for cancellation

(941)

(738)

(1,972)

Equity dividends paid

(3,760)

(7,655)

(9,849)

 

----------

----------

----------

Net cash (outflow)/inflow from financing activities

12,320

(7,400)

(10,564)

 

----------

----------

----------

Net (decrease)/increase in cash and cash equivalents

13,343

(2,008)

(1,714)

Cash and cash equivalents at beginning of period

21,683

23,397

23,397

 

----------

----------

----------

Cash and cash equivalents at end of period

35,026

21,389

21,683

 

----------

----------

----------

 


 

RISK MANAGEMENT

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

OTHER MATTERS

 

The unaudited interim financial statements for the six months ended 30 September 2022 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company's independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 31 March 2022 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies; the independent auditor's report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The interim financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2022.

 

Each of the directors confirms that to the best of their knowledge the interim financial statements have been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board and the interim financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

 

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

 

The calculation of return per share is based on the return after tax for the six months ended 30 September 2022 and on 125,359,671 (2021: 109,782,428) ordinary shares, being the weighted average number of shares in issue during the period.

 

The calculation of net asset value per share is based on the net assets at 30 September 2022 divided by the 125,305,351 (2021: 110,084,493) ordinary shares in issue at that date.

 

The interim dividend of 2.0 pence per share for the year ending 31 March 2023 will be paid on 13 January 2023 to shareholders on the register at the close of business on 9 December 2022.

 

A copy of the interim financial report for the six months ended 30 September 2022 will be available on the Mercia Asset Management PLC website.

 

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