Unicorn AIM VCT plc (the "Company" or the "VCT")

LEI: 21380057QDV7D34E9870

 

 

Annual Results Announcement for the year ended 30 September 2019

The full Annual Report and Accounts for the year ended 30 September 2019 can be found on the Company's website www.unicornaimvct.co.uk

 

FINANCIAL HIGHLIGHTS

(for the year ended 30 September 2019)

·     Net asset value ("NAV") total return for the year ended 30 September 2019, after adding back the dividends of 6.5p paid in the year, declined by 6.6%

·     Final dividend of 3.5p proposed for the financial year ended 30 September 2019

·     Offer for Subscription raised £24.3 million (after costs)

 

Fund performance

Ordinary Shares	Shareholders' Funds* (£ million)	Net asset value per share (NAV) (p)	Cumulative dividends** paid per share (p)***	Net asset value plus cumulative dividends paid per share (p)***	Share price (p)
30 September 2019	201.1	153.9	54.5	208.4	137.0
31 March 2019	178.3	144.4	51.5	195.9	129.0
30 September 2018	201.4	171.8	48.0	219.8	144.0
31 March 2018	185.5	156.4	45.0	201.4	133.0

 

* Shareholders funds/net assets as shown on the Statement of Financial Position below.

 

** The Board has recommended a final dividend of 3.5p per share for the year ended 30 September 2019 bringing total dividends for the year to 6.5p per share, unchanged from the previous year. If approved by Shareholders, this payment will bring total dividends paid since the merger with Unicorn AIM VCT II plc on 9 March 2010 to 58.0p.

 

***Since the merger of the Company with Unicorn AIM VCT II plc on 9 March 2010 and merger of all former share classes.

 

STRATEGIC REPORT

The purpose of this Strategic Report is to inform Shareholders of the Company's progress on key matters and assist them in assessing the extent to which the Directors have performed their legal duty to promote the success of the Company in accordance with section 172 of the Companies Act 2006.

The Investment Manager's Review also includes a balanced and comprehensive analysis of the development of the business during the financial year and the position of the Company's investments at the end of the year.

 

Chairman's Statement

I am pleased to present the Company's Audited Annual Report for the year ended 30 September 2019.

 

Economic & Market Review

The period under review has been a difficult one for UK equity markets. The political landscape is currently as uncertain as at any point since the EU referendum was held in June 2016.

With UK economic growth currently at its lowest rate for ten years, the possibility of a recession appears to be increasing. The Office of National Statistics recently confirmed that Gross Domestic Product had declined by 0.1% during September, while growth in the three month period to the end of September was just 0.3% overall. The modest growth recorded in the third quarter followed a second quarter which saw the UK economy contract by 0.2%. The possible implications of a 'no-deal' Brexit has understandably led business leaders to defer investment decisions. According to the National Bureau of Economic Research (NBER), business investment has seen a significant decline of approximately 11% over the three years following the referendum. In monetary terms, the NBER claims that this is equivalent to a £20 billion loss to the UK economy. Given that business investment is thought to account for around 10% of overall GDP a year (with firms spending £198 billion in 2018), this decline is bound to have acted as a brake on UK economic growth. In addition, falling levels of business investment are also likely to affect employment growth, while according to NBER, the distractions presented by Brexit have caused productivity to fall by 5%.

Political division and economic uncertainty continue to weigh on equity markets generally and these factors have negatively impacted investor confidence, which in particular has had an adverse effect on the performance of the FTSE AIM All-Share Index. During the twelve-month period ended 30 September 2019, the FTSE 100 Index delivered a modestly positive total return of 3.2%, while the FTSE AIM All-Share Index fell sharply over the year, generating a negative total return of 19.4%.

Investment Performance Review

The performance of the investment portfolio during the twelve-month period ended 30 September 2019 was mixed.

 In overall terms, Net Asset Value per share fell from 171.8 pence to 153.9 pence during the course of the financial year which, after adding back the 6.5 pence per share of dividends paid during the period, represents a total return decline of 6.6%. In relative terms, the total return of the Company therefore under-performed that of the FTSE 100 Index, but significantly outperformed the FTSE AIM All-Share Index.

The portfolio remains predominantly made up of investments in businesses that are listed on the Alternative Investment Market. Given that the period under review was an extremely challenging one for AIM quoted companies, it is unsurprising that the AIM-listed element of the portfolio also struggled in performance terms.

In addition, and as noted in previous reports, the introduction of more restrictive rules for VCTs, means that all new VCT qualifying investment must be targeted at earlier stage businesses. The operational and financial performance of these newer, less mature, VCT qualifying investments has also resulted in portfolio performance becoming more volatile than in previous years. It is therefore important to remind all Shareholders of the risks associated with venture capital investing and to again emphasise that any investment in the Company should be regarded as being relatively high risk and long term in nature.

The political and economic backdrop has been unhelpful for equity markets for some considerable time, particularly for AIM-listed companies, but it also helps serve to illustrate some of the key strengths offered by your Company's long-term approach to venture capital investing. Over the past eighteen years, the Investment Manager has constructed a diverse portfolio of investments in businesses operating across a variety of sectors and at different stages of development. At the financial year end, the combined value of the fifteen largest VCT qualifying investments represented over 50% of total net assets. Most of these businesses have been held in the portfolio for many years and have generated very considerable capital gains, both realised and, as yet, unrealised. In size terms, these are substantial and relatively mature businesses, with the enterprise value of the smallest being around £30 million, while the largest is currently in excess of £2 billion. Some 80% of these companies are profitable and healthily cash generative, while 60% are dividend paying and only 20% of them carry any debt on their balance sheets. Most of these businesses also remain in growth mode, primarily because they sell highly specialised products or services that fulfil a real need and deliver tangible benefits to their customers. It is therefore not unreasonable to expect portfolio performance to be relatively resilient during periods of market stress.

In terms of liquidity risk and stock specific risk the portfolio also continues to be prudently managed. All the investee companies in the top fifteen by value have a market capitalisation in excess of £30 million, while the largest is capitalised at more than £2 billion. The largest single holding accounts for around 7% of total net assets, while only two of the top fifteen investments are in unquoted companies and therefore categorised as being highly illiquid. In addition, the Investment Manager has always been careful to limit the ownership level in individual businesses. The Company owns more than ten percent of the issued equity in only three companies within the top fifteen investments by value and, across the entire portfolio, only one in excess of 20%.

As explained above, VCT compliant investment is now required to be targeted towards younger, less well-established businesses, which means they are typically loss-making at the point of initial investment. Despite this change in focus, a significant proportion of the Trust's assets remain invested in operationally strong and financially robust businesses, which have matured sufficiently to enable them to generate cash and maintain profitability on a consistent basis.

During the period under review, dividends were paid, or proposed, by approximately half of the companies held in the portfolio and dividend income of £2.7 million (2018: £2.9 million) was received. The level of dividend income declined modestly in the period under review. Although total returns may remain volatile over shorter time periods, the Investment Manager is nonetheless confident of delivering positive capital returns over the longer term, while also being able to generate sufficient distributable reserves to enable the Board to maintain a regular and reasonably predictable level of dividend payments to Shareholders.

At the financial year end, the investment portfolio consisted of 76 active VCT qualifying companies and 20 non-qualifying companies.

Net Assets

As at 30 September 2019, the audited net assets of the Company were £201.1 million, as compared to £201.4 million on 1 October 2018. Total net assets remained essentially flat during the year, primarily helped by the proceeds of the Offer for Subscription, which raised £24.3 million net of costs and helped offset the effect of share buybacks, dividends, the costs of running the Company and the fall in the underlying value of the investment portfolio.

Portfolio Activity

The year under review was relatively subdued in terms of new qualifying investments. During the period, two new VCT qualifying investments were made, at a total cost of £2.5 million. In addition, £4.6 million of VCT qualifying capital was allocated across ten of the existing investee companies, in order to support their further planned growth.

An additional £16.0 million was invested in non-qualifying investments or funds during the period. The purpose of these shorter term investments is primarily to provide Shareholders with market exposure, while the Investment Manager undertakes appropriate due diligence on potential longer term VCT-qualifying investments. These investments are typically made in large quoted companies that are constituents of the FTSE 350 Index or in Unicorn managed Open Ended Funds, where liquidity concerns are not an issue.

A number of full and partial disposals were also made during the course of the financial year. Total proceeds from disposals of qualifying investments amounted to £5.1 million, realising an overall capital profit of £3.6 million. The Investment Manager also made a number of full and partial disposals in non-qualifying investments during the period. The total amount realised from these transactions was £15.2 million and the overall capital profit realised amounted in aggregate to £2.4 million.

A more detailed analysis of investment activity and performance can be found in the Investment Manager's Review below.

VCT Status

The Government introduced new legislation in November 2017 applicable to Venture Capital Trusts. The most important of these new rules came into effect in the 2019/2020 tax year and are designed to ensure that capital is directed at young, developing businesses, which might otherwise find it difficult to secure funding to finance their plans for growth.

One of the key tests, from accounting periods commencing after 6 April 2019, is the requirement for at least 80% (previously 70%) of a Venture Capital Trust's total assets to be invested in VCT qualifying companies. Excluding new capital raised in Offers for Subscription within the last three years, Unicorn AIM VCT's qualifying percentage is 85.8% of total assets. All other HM Revenue & Customs tests have also been complied with and the Board has been advised by its VCT status advisor, PWC, that the Company continues to maintain its Venture Capital Trust status. It will, of course, remain a key priority of the Board to ensure that the Company retains this VCT status.

Dividends

An interim dividend of 3.0 pence per share, for the half year ended 31 March 2019, was paid to Shareholders on 9 August 2019.

The Board is recommending a final dividend for the financial year ended 30 September 2019 of 3.5 pence per share (paid from income: 0.5 pence; paid from capital: 3.0 pence), payable on 6 February 2020 to Shareholders on the register as at 10 January 2020.

Subject to receiving Shareholder approval for payment of the proposed final dividend, total dividends in respect of the financial year ended 30 September 2019, will be 6.5 pence per share, unchanged from the previous year. This represents a tax free yield to eligible UK Shareholders of 4.2% based on the Net Asset Value of 153.9 pence per share as at 30 September 2019 and 4.7% based on the year end share price of 137.0 pence per share.

 

Share premium account and Capital redemption reserve

Following the Shareholder approval given at the Annual General Meeting held on 10 January 2019, the Company applied to the Court to cancel the Share premium account and Capital redemption reserve. The Court approved the cancellation on 26 March 2019 and the value of each reserve was added to the Special reserve. The Special reserve can be used to write or set off losses, facilitate distributions and buy backs and for other corporate purposes.

 

Dividend Reinvestment Scheme

In August 2019, the Company announced a dividend reinvestment scheme giving Shareholders the opportunity to elect to reinvest dividends by subscribing for new shares at net asset value. The first opportunity to receive shares under the scheme will be the payment of the final dividend on 6 February 2020. Details of the scheme are given on page 67 of the Annual Report.

Share Buybacks & Share Issues

The Board continues to believe that it is in the best interests of the Company and its Shareholders to make market purchases of its shares from time to time. During the period from 1 October 2018 to 30 September 2019, the Company bought back 3,273,771 of its own Ordinary Shares for cancellation, representing 2.8% of the opening share capital, at an average price of 135.3 pence per share including costs.

Future repurchases of shares will be made in accordance with guidelines established by the Board and will be subject to the Company having the appropriate authorities from Shareholders and sufficient funds available for this purpose. Share buybacks will also be subject to the Listing Rules and any applicable law at the relevant time. Shares bought back in the market are normally cancelled.

An Offer for Subscription was launched on 29 January 2019. The Offer was strongly supported and closed, fully subscribed, on 4 April 2019. The total raised, net of all costs, was £24.3 million and resulted in the issue of 16,707,794 new shares. On behalf of the Board, I would like to welcome all new Shareholders and to thank existing Shareholders for their continued support.  As at 30 September 2019, there were 130,660,071 Ordinary Shares in issue.

Corporate Governance

The Board has noted the process undertaken by the Financial Reporting Council ("FRC") to review and update the UK Corporate Governance Code which will be incorporated into the amended Association of Investment Companies ("AIC") code which the Company follows. These changes became applicable to the Company with effect from 1 October 2019 and the Board has implemented the changes required. Details are given in the Corporate Governance Statement on page 36 of the Annual Report.

Board Changes

As I indicated in last year's report and at the interim stage, I have decided to retire at the time of the publication of the 2020 interim results, having chaired the Board since the inception of the Company in 2001. In accordance with our succession planning programme Tim Woodcock was appointed as an independent non-executive director on the 10 June 2019 following a recruitment process managed by Charlotta Ginman. I understand that my colleagues propose to invite Tim to take over the chair following the Annual General Meeting in January 2020. It has been a great privilege to chair the Company since it was set up and I am proud of our collective achievements. I wish Tim, the Board, Unicorn Asset Management, Shareholders and all who are involved in the business every success for the future.

Outlook

The increasingly volatile political situation in the UK and lack of clear direction has begun to have a negative impact on the UK economy. While high levels of political division and economic uncertainty continue to unsettle UK equity markets, it is likely that the Company's NAV performance may remain volatile.

On 29 October 2019, a majority of MPs voted to approve an early General Election, which subsequently received Royal Assent. This election is scheduled to take place on 12 December 2019 and Shareholders should be aware that the outcome may create considerable additional risks to performance. For example, if the vote results in a 'hung' parliament, with no obvious prospect of achieving a workable coalition, then it is unlikely the UK equity market will respond favourably. In order to mitigate against the potentially negative impact of an unfavourable election result, the Investment Manager has adopted a particularly cautious short term approach. The amount of net cash currently held is at a level considerably higher than normal, while a further amount, in excess of £20 million, is readily realisable, since it is invested in large, highly liquid stocks.

Despite the heightened levels of uncertainty, the Investment Manager continues to source potential VCT qualifying investments from among AIM IPOs and AIM-listed companies and from among the wider universe of unquoted, privately held businesses. At the current time, only a small number of unlisted investments are actively under consideration and, while economic and political uncertainty may continue to affect the availability of AIM IPO investments in the short term, there should nonetheless be opportunities to provide further capital in support of the growth plans of some of our existing investee companies.

As the pipeline of promising potential VCT qualifying investments is lower than in previous years, the Board is monitoring the situation closely, and no decision has yet been made with regard to the possibility of a new Offer for Subscription before the end of the current tax year.

Finally, I would like to take this opportunity to thank all Shareholders for their continued support of the Company and to invite you to attend the Company's Annual General Meeting. This is to be held on 30 January 2020 at The Great Hall, The Charterhouse, Sutton's Hospital, Charterhouse Square, London EC1M 6AN.  Full details can be found on page 68 of the Annual Report

 

Peter Dicks

Chairman

3 December 2019

 

The Company and its Business Model

The Company is registered in England and Wales as a Public Limited Company (registration number 04266437) and is approved as a Venture Capital Trust ("VCT") under section 274 of the Income Tax Act 2007 (the "ITA"). In common with many other VCTs, the Company revoked its status as an investment company as defined in section 266 of the Companies Act 1985 on 17 August 2004, to make it possible to pay dividends from capital.

The Company's shares are listed on the London Stock Exchange main market under the code UAV and ISIN GB00B1RTFN43.

The Company is an externally managed fund with a Board currently comprising five non-executive Directors. Investment management and operational support are outsourced to external service providers, with the strategic and operational framework and key policies set and monitored by the Board as described in the diagram on page 5 of the Annual Report. Further information on the service providers is outlined in the Corporate Governance Statement on page 38 of the Annual Report.

 

The Board has overall responsibility for the Company's affairs including the determination of its investment policy. Risk is spread by investing in a number of different businesses across different industry sectors. The Investment Manager is responsible for managing sector and stock specific risk and the Board does not impose formal limits in respect of such exposures. However, in order to maintain compliance with HMRC rules and to ensure that an appropriate spread of investment risk is achieved, the Board receives and reviews comprehensive reports from the Investment Manager on a monthly basis. When the Investment Manager proposes to make any investment in an unquoted company, the prior approval of the Board is required.

 

The Board's Strategy

 

Investment Objective

The Company's objective is to provide Shareholders with an attractive return from a diversified portfolio of investments, predominantly in the shares of AIM quoted companies, by maintaining a steady flow of dividend distributions to Shareholders from the income as well as capital gains generated by the portfolio.

 

It is also the objective that the Company should continue to qualify as a Venture Capital Trust, so that Shareholders benefit from the taxation advantages that this brings. To achieve this at least 80% for accounting periods commencing after 6 April 2019 (previously 70%) of the Company's total assets are to be invested in qualifying investments of which 70% by VCT value (30% made in respect of investments made before 6 April 2018 from funds raised before 6 April 2011) must be in ordinary shares which carry no preferential rights (save as permitted under VCT rules) to dividends or return of capital and no rights to redemption.

 

Investment Policy

In order to achieve the Company's investment objective, the Board has agreed an investment policy which requires the Investment Manager to identify and invest in a diversified portfolio, predominantly of VCT qualifying companies quoted on AIM that display a majority of the following characteristics:

 

·     experienced and well-motivated management;

·     products and services supplying growing markets;

·     sound operational and financial controls; and

·     potential for good cash generation to finance ongoing development and support for a progressive dividend policy.

 

Asset allocation and risk diversification policies, including maximum exposures, are to an extent governed by prevailing VCT legislation. No single holding may represent more than 15% (by VCT value) of the Company's total investments and cash, at the date of investment.

 

There are a number of VCT conditions which need to be met by the Company which may change from time to time. The Investment Manager will seek to make qualifying investments in accordance with such requirements.

 

Asset mix

Where capital is available for investment while awaiting suitable VCT qualifying opportunities or is in excess of the 80% VCT qualification threshold for accounting periods commencing after 6 April 2019 (previously 70%), it may be held in cash or invested in money market funds, collective investment vehicles or non-qualifying shares and securities of fully listed companies registered in the UK.

 

Borrowing

To date the Company has operated without recourse to borrowing. The Board may, however, consider the possibility of introducing modest levels of gearing up to a maximum of 10% of the adjusted capital and reserves, should circumstances suggest that such action is in the interests of Shareholders.

 

The effect of any borrowing is discussed further on page 31 of the Annual Report under "AIFMD".

 

Performance during the year

As at 30 September 2019, the audited NAV of the Company was 153.9 pence per share, having fallen by 17.9 pence from 171.8 pence per share at the start of the financial year under review, compared with an increase of 8.7 pence per share in 2018. After adding back dividends of 6.5 pence per share paid in the year, the total return to Shareholders declined by 11.4 pence or 6.6% compared with an increase of 15.2 pence or 9.3% in the previous year. In comparison, the total return from the FTSE AIM All-Share Total Return Index was a negative 19.4% over the same period. The audited net assets of the Company were £201.1 million (2018: £201.4 million) at the financial year end.

 

At the financial year end, there were 76 active VCT qualifying and 20 non-qualifying companies held in the portfolio. These investments are spread across 25 different sectors. Many of the businesses invested in are cash generative and operate with strong balance sheets. The Investment Manager continues to focus on a select number of key metrics in order to monitor and assess the financial health of these businesses. Historically, investment has been committed to new companies which are profitable at the time of first investment, although in light of the new State Aided funding rules, VCT qualifying investments are now being made in earlier stage businesses, many of which may not be profitable at the time of investment.

 

In the year to 30 September 2019, a total of £20.3 million was realised through the sale of investments while £24.3 million (after costs) was raised from an Offer for Subscription. Approximately £23.1 million was deployed in new investments and approximately £8.0 million was paid out as dividends to Shareholders. A further £4.4 million was spent on the operating costs of the Company and £4.4 million on share buybacks.

 

Over the 12 months to 30 September 2019 there was a net loss on investments of £10.5 million and the total loss on ordinary activities was £12.2 million, equivalent to negative earnings of 9.8 pence per share. The profit on the revenue account was £1.0 million.

 

Since the merger with Unicorn AIM VCT II plc, which was completed in March 2010 when all previous share classes merged, the total return to Shareholders has been 127.0%, including the payment of 54.5 pence per share in dividends, which have been tax free to qualifying Shareholders.

 

Key Performance Indicators

The Board uses the following key indicators to measure the Investment Manager's performance, thereby helping Shareholders to assess how the Company is performing against its objective:

 

-      NAV per share, cumulative dividends paid and cumulative total Shareholder return

-      Earnings per share

-      Annual and cumulative total return

-      Running costs

 

Further details can be found on pages 7 and 8 of the Annual Report.

 

Running Costs

The Ongoing Charges of the Company for the financial year under review represented 2.3% (2018: 2.2%) of average net assets, which is well below the agreed cap of 2.75% and remains competitive against other VCTs.

Shareholders should note that this ratio has been calculated in accordance with the Association of Investment Companies' ("AIC") recommended methodology, published in May 2012. This figure indicates the annual percentage reduction in Shareholder returns as a result of recurring operational expenses. Although the Ongoing Charges figure is based on historic information, it does provide Shareholders with a guide to the level of costs that may be incurred by the Company in the future. The costs of trail commission paid to intermediaries of £148,000 is not included in this calculation.

Under the revised management agreement effective from 1 October 2018 and as shown in note 3, the Investment Manager receives a management fee of 2% per annum of net assets up to £200 million and 1.5% per annum of net assets in excess of £200 million (excluding  investments in OEICs managed by the Investment Manager). Other expenses are shown in note 4 on page 54 of the Annual Report.

Further information in respect of the Company's performance can be found in the Financial Highlights above.

Key Events during the Year

The Company raised £24.3 million (after costs) through the Offer for Subscription and issued 16,707,794 shares, details of which are given in note 13 on page 59 of the Annual Report.

 

Key Policies

The Board sets the Company's policies and objectives and ensures that its obligations to Shareholders are met. Besides the Investment Policy already referred to, the other key policies set by the Board are outlined below.

 

• Dividend policy

The Board remains committed to a policy of maintaining a steady flow of dividend distributions to Shareholders from the income and capital gains generated by the portfolio. Total dividends of 6.5 pence per share were paid during the year which amounted to £8.0 million. Since the original launch of Unicorn AIM VCT in 2001, Shareholders have, in aggregate, received approximately £67.5 million in dividend distributions, including those paid to former shareholders in Unicorn AIM VCT II plc.

 

The ability to pay dividends and the amount of such dividends is at the Board's discretion and is influenced by the performance of the Company's investments, available distributable reserves and cash, as well as the need to retain funds for further investment and ongoing expenses.

 

The Company paid an interim dividend during the year of 3.0 pence per share on 9 August 2019.

 

The Directors are recommending a final dividend of 3.5 pence for approval at the Annual General Meeting to be held on 30 January 2020. This would bring total dividends to 6.5 pence for the year under review.

 

Details of the Company's Dividend Reinvestment Scheme are outlined on page 67 of the Annual Report.

• Share buybacks and discount policy

The Board believes that it is in the best interests of the Company and its Shareholders to make market purchases of its shares from time to time.

 

There are three main advantages to be gained from maintaining a flexible approach to share buybacks; namely:

·     Regular share buybacks provide a reliable mechanism through which Shareholders can realise their investment in the Company, rather than being reliant on what is typically a limited secondary market.

·     Share buybacks, when carried out at a reasonable discount to underlying net assets, help modestly to enhance NAV per share for continuing Shareholders.

·     Implementing share buybacks on a regular basis may help to control the discount to NAV.

 

The Board agrees the level of discount to NAV at which shares will be bought back and keeps this under regular review. The Board seeks to maintain a balance between the interests of those wishing to sell their shares and continuing Shareholders.

 

The Company has continued to buy back shares for cancellation at various points throughout the financial year in accordance with the above policy. A total of 3,273,771 shares with a nominal value of £32,738 were purchased for cancellation during the course of the year, at an average price including costs of 135.3 pence per share, for a total consideration of £4.4 million. At the financial year end, the Company's shares were quoted at a mid price of 137.0 pence per share representing a discount to NAV per share of 11.0%. This was before the announcement of the upward revaluation in unquoted investments following the year end.

 

The Board intends to continue with the above buyback policy. Any future repurchases will be made in accordance with guidelines established by the Board from time to time and will be subject to the Company having the appropriate authorities from Shareholders and sufficient funds available for this purpose. Share buybacks will also be subject to prevailing market conditions, Market Abuse Rules and any other applicable law at the relevant time. Shares bought back are normally cancelled.

 

• Principal risks and uncertainties

The Directors have carried out a review of the principal risks faced by the Company as part of the internal controls process, as outlined below. Note 17 to the Financial Statements on pages 60 to 65 of the Annual Report also provides information on the Company's financial risk management objectives and exposure to risks.

 

Risk	Possible consequence	How the Board guards against risk
Investment and strategic risk	Unsuitable investment strategy or share or investment selection could lead to poor returns to Shareholders.	Regular review of investment strategy by the Board. Monitoring of the performance of the investment portfolio on a regular basis. All unquoted investments require prior investment authorisation from the Board.
Regulatory and tax risk	The Company is required to comply with the Companies Act 2006, ITA, AIFMD (as applicable to small registered UK AIFMs), UKLA Rules and UK Accounting Standards. Breaching these rules may result in a public censure, suspension from the Official List and/or financial penalties. There is a risk that the Company may lose its VCT status under the ITA. Should this occur, Shareholders may lose any upfront income tax relief they received and be taxed on any future dividends paid and capital gains received if they dispose of their shares.	Regulatory and legislative developments are kept under close review by the Board. The Company's VCT qualifying status is continually reviewed by the Investment Manager and the Administrator. PricewaterhouseCoopers LLP has been retained by the Board to undertake an independent VCT status monitoring role.
Operational risk	The Company has no employees and is therefore reliant on third party service providers. Failure of the systems at third party service providers could lead to inaccurate reporting or monitoring. Inadequate controls could lead to the misappropriation of assets.	Internal control reports are provided by service providers on an annual basis. The Board considers the performance of the service providers annually and monitors activity on a monthly basis. The Board discusses succession planning with its service providers.
Fraud and dishonesty risks	Fraud involving Company assets may occur, perpetrated by a third party, the Investment Manager or other service provider. Cyber attacks on the Company could lead to financial loss and impact on the Company's reputation. Cyber attacks on the Company's investee companies could affect the value of the Company's investments.	Internal control reports are provided by service providers on a regular basis. The Administrator is independent of the Investment Manager. The Board engaged a cyber-security firm to review the Company's systems and those of its suppliers in the previous year.
Financial Instrument risks	The main risks arising from the Company's financial instruments are due to fluctuations in their market prices, interest rates, credit risk and liquidity risk.	The Board regularly reviews and agrees policies for managing these risks and full details can be found in Note 17 on pages 60 to 65 of the Annual Report.
Economic, BREXIT and political risks	Events such as recession, inflation or deflation, movements in interest rates and technological change can affect trading conditions and consequently the value of the Company's investments. The withdrawal of the UK from the European Union creates significant uncertainty in markets and regulatory environments which may affect the value of the Company's investments. Other geographical issues may affect the Company's performance at both macro and micro economic level.	While no single policy can obviate such risks the Company invests in a diversified portfolio of companies, whilst seeking to maintain adequate liquidity.

 

The Regulatory Environment

The Board and Investment Manager are required to consider the regulatory environment when setting the Company's strategy and making investment decisions. A summary of the key considerations is outlined below.

 

Human rights

The Board seeks to conduct the Company's affairs responsibly and expects the Investment Manager to consider human rights implications when making investment decisions.

 

Recruitment and succession planning

During the year the Board identified the need to refresh its composition through the recruitment of a new Director. The process was undertaken by a committee comprising Jocelin Harris, Jeremy Hamer and led by Charlotta Ginman. Nurole were engaged to seek suitable applicants and provided a shortlist of candidates for interview. Timothy Woodcock was subsequently appointed on 10 June 2019. As stated in the Chairman's Statement above, Peter Dicks will retire from the Board during the coming year.

 

Diversity

The Directors are aware of the need to have a Board which, as a whole, comprises an appropriate balance of skills, experience and diversity. Appointments to the Board are made according to expertise and knowledge. Following the appointment of Timothy Woodcock during the year, the Board comprises four male and one female non-executive Directors and the Board has confirmed that it is planned that the Chairman will retire during the current year.

 

Anti-bribery, corruption and tax evasion policy

The Company has adopted a zero tolerance approach to bribery, corruption and the facilitation of tax evasion in its business activities and will not tolerate these under any circumstances in any transaction in which it is involved. The Company values its reputation for ethical behaviour and for financial probity and reliability and the Directors are committed to working to the highest ethical standards.

 

The Company expects and requires each of its service providers to work to the same standard and has obtained confirmation from them that this is the case.

 

Environmental and social responsibility

The Board seeks to conduct the Company's affairs responsibly and expects the Investment Manager to consider relevant social and environmental matters when appropriate, particularly with regard to investment decisions. The Company offers electronic communications where acceptable, to reduce the volume of paper it uses in sending communications to Shareholders. In addition, Board and Committee meetings are held by conference call where it is appropriate to do so. The Company's Annual and Half-Yearly reports are printed on paper sourced from forests certified by the Forestry Stewardship Council ("FSC") that meet environmental, social and economic standards.

 

Viability Statement

The Board has considered the requirement to confirm that the Company is able to meet all liabilities when due and that it can continue to operate for a period of at least twelve months from the date of signing the Annual Report. The Directors state on page 31 of the Annual Report that they consider the Company is a going concern over this timeframe.

 

Under the UK Corporate Governance code there is a requirement that the Board performs a robust assessment of the principle risks relating to the Company. The last review was performed in July 2019.

 

The Directors have considered the viability of the Company as part of their continuing programme of monitoring risk and conclude that five years is a reasonable time horizon to consider the continuing viability of the Company. This is also in line with the requirement for the Company to continue in operation so investors subscribing for new shares issued by the Company can hold their shares for the minimum five year period to allow them to benefit from the tax incentives offered when those shares were issued. The last allotment of shares being in April 2019.

 

In order to maintain viability, the Company has a detailed risk control framework which has the objective of reducing the likelihood and impact of: poor judgement in decision-making, risk-taking that exceeds the levels agreed by the Board, human error, or control processes being deliberately circumvented. These controls are reviewed by the Board on a regular basis to ensure that controls are working as prescribed. In addition, formal reviews of all service providers are undertaken annually and activity is monitored at least monthly.

 

The Directors consider that the Company is viable for the five year time horizon for the following reasons:

■    At the year end the Company had a diversified investment portfolio in addition to its VCT qualifying investments comprising: £19 million invested in non-qualifying, fully listed shares which are readily realisable and a further £16 million in open ended funds and cash. The Company therefore has sufficient immediate liquidity in the portfolio for any near term requirements.

■    The ongoing charges ratio of the Company as calculated using the AIC recommended methodology equates to 2.3% of net assets, which is competitive for the VCT sector.

■    The Board anticipates that there will continue to be suitable qualifying investments available that will enable the Company to maintain its operations successfully over the five year time horizon.

■    The Company has no debt or other external funding apart from its ordinary shares.

 

The Directors have also considered the viability of the Company should there be a slowdown in the economy or a correction of the markets leading to lower dividend receipts and asset values. As stated above, Ongoing Charges equate to 2.3% of net assets of which the Investment Management fee (as reduced by the Company's investments in Unicorn funds) equates to 2.0% of net assets up to £200 million and 1.5% of net assets in excess of £200 million. Therefore, any fall in the value of net assets will result in a corresponding fall in the major expense of the Company.

The Directors have concluded that there is a reasonable expectation that the Company can continue in operation over the five year period.

 

Prospects

The prospects for the Company are discussed in detail in the Outlook section of the Chairman's Statement above.

For and behalf of the Board

 

 

Peter Dicks

Chairman

3 December 2019

 

Investment Manager's Review

 

Introduction

The financial year ended 30 September 2019 proved to be a challenging period for the Alternative Investment Market and, as a result, the Company struggled to make headway, ultimately failing to deliver a positive total return to Shareholders for the first time in ten years. Although it is always disappointing to report on a year during which total returns have been negative, it is nonetheless encouraging to note that performance overall was relatively resilient. The decline in value experienced by the Company was significantly less than the fall suffered by the FTSE AIM All-Share Index over the same time period, which highlights the strength derived from constructing and managing a diverse but balanced portfolio of investments.

 

As at 30 September 2019, the audited net assets of the Company amounted to £201.1 million (30 September 2018: £201.4 million), and the audited net asset value per share ("NAV") was 153.9 pence. After adding back the 6.5 pence per share of dividends paid during the period, the total return declined by 11.4 pence per share, representing a decrease of 6.6% upon the opening net asset value of 171.8 pence per share.

 

Market Review

The twelve month period ended 30 September 2019 was notable for heightened levels of political turmoil and endless BREXIT related drama, which have inevitably begun to take their toll on UK economic growth, while simultaneously further dampening investor enthusiasm for UK equity markets. All of the main UK equity markets encountered periods of significant volatility during the course of the period under review and this erratic performance was particularly evident in the Alternative Investment Market.

 

During the period, the FTSE 100 Index ultimately managed to register a modestly positive total return of 3.2%. This outcome can largely be attributed to the global nature of most of its constituents, which continued to benefit from sustained weakness in the value of Sterling. Smaller quoted companies, which are generally much more focused on the domestic economy, found life considerably tougher and, in many cases, the struggle to generate sufficient profit growth to support valuation multiples proved too great. The incidence of profit warnings and business failures increased noticeably as the financial year progressed, with the demise of iconic brands such as Thomas Cook being particularly notable. Although not as high profile, companies listed on the Alternative Investment Market also suffered, as investor appetite for risk waned and trading conditions deteriorated.

 

Having started the period under review at a level in excess of 1228 points, the FTSE AIM All-Share Total Return Index fell sharply in the three month period to the end of December 2018. Despite recovering significantly in the first half of 2019, the Index came under further pressure in the three months to 30 September 2019. As a result, the Index closed the period under review at a level close to 990 points which, in total return terms, represented a decline approaching 20%.

 

Performance Review

The majority of the Company's total assets are invested in VCT qualifying, AIM-listed companies and, given the steep falls experienced by the FTSE AIM All-Share Index during the period, it is unsurprising that the overall performance of the portfolio also suffered.

 

The period under review started particularly poorly for both UK equity markets and for the Company's investment portfolio. Investor sentiment deteriorated markedly from the beginning of October 2018, as political divisions deepened over how best to implement Britain's exit from the European Union. In times of heightened volatility, it is normal to see levels of risk aversion increase and, during the first quarter of the Company's financial year, equity markets fell sharply, which was reflected in a decline in the NAV of 17.5%. In the following six months to 30 June 2019, equity markets stabilised and the value of the portfolio also recovered, with the NAV increasing by 16.2%. During this period, there was also a strong contribution to performance from meaningful uplifts in the value of two investments in unquoted companies. In the final quarter of the year under review however, equity markets once again came under pressure, and this was reflected in an overall decline in the NAV of 6.6%.

 

The investment environment has been challenging for a variety of well-understood and previously discussed reasons. Encouragingly however, most of the declines in value experienced by portfolio holdings during the year were related to economic factors or market declines, rather than being self-inflicted issues caused by poor execution of operational or financial plans.

 

Despite the many and significant headwinds, portfolio performance remained relatively resilient. Although the incidence of profit warnings increased, the negative impact of these setbacks was partially offset by robust performance delivered by a meaningful proportion of the AIM-listed holdings in the portfolio. In addition, significant uplifts to the carrying values of two unquoted investee companies were made; Hasgrove and Interactive Investor, reflecting their strong and continued growth during the course of the year under review.

 

Reflecting the challenging market conditions it has also been a quiet period for AIM Initial Public Offerings (IPOs). During the financial year, the Company participated in only one IPO (Renalytix) of a VCT qualifying company. Encouragingly, this investment has proved worthwhile, making a meaningfully positive initial contribution to performance.

 

The investment portfolio remains diversified both by number of holdings and by sector exposure. At the financial year end, the Company held investments in 76 active VCT qualifying companies and 20 non-qualifying investments. These investments are spread across 25 different sectors.

 

Qualifying Investments

A review of the ten most meaningful contributors to performance from VCT qualifying investments (both positive and negative) follows:

 

(bracketed figures represent the share price movement for the year under review or since the date of investment on a mid-price basis)

 

Abcam (-20.1%) is a global leader in the supply of research tools to the life sciences sector. Despite releasing financial results for its financial year ended 30 June 2019, which reported another year of strong operational and financial performance, Abcam's share price fell quite sharply over the course of the year. Although total revenues increased by 11.4% to £259.9 million, adjusted earnings per share only gained by 0.6% to 32.6p. This result was regarded as being disappointing by the majority of shareholders and analysts. Abcam, however, remains a cash generative business, reporting a net operating cash inflow of £70.2 million in its financial year ended 30 June 2019. This strong free cashflow is needed, however, to enable management to execute on an ambitious investment programme designed to facilitate future growth. In the next five years it is expected that the business will spend up to £225 million, as part of a plan designed to increase revenues to £450 million per year. This is generally considered to be a relatively high risk strategy and, as a consequence, Abcam's share price has been under pressure. We have made numerous partial disposals of Abcam shares since first investing in November 2005. This process continued in the financial year under review, which reflects the Investment Manager's prudent approach to managing stock specific risk.

 

AB Dynamics (+29.1%) supplies advanced testing systems to the global automotive manufacturing industry, designed to assist research and development and improve production quality control. In its results for the financial year ended 31 August 2019, AB Dynamics reported strong growth in revenues of 56% to £58.0 million, while adjusted earnings per share increased by 50% to 55.4p. Continued strong cash generation resulted in net cash increasing by 127% to £36.2 million (2018: £15.9 million) at the financial year end and the Board have therefore proposed a 20% increase in the total dividend for the year to 4.4p. AB Dynamics continues to experience good order growth and the new Chief Executive is therefore increasing investment in new product development and operational capability in order to meet anticipated future demand.

 

Anpario (-33.3%) is international producer and distributor of natural feed additives for animal health, nutrition and biosecurity. Anpario's interim results recorded a recovery in trading conditions across a number of its international markets. Group sales in the six months to 30 June 2019 were broadly the same as in the equivalent period last year, but the impact of African Swine Fever in China, together with the trade dispute between the US and China, created tougher than expected trading conditions in Asia. This was significantly offset by a strong recovery in Latin American and Middle East markets and continued progress in the US. These trends highlight the benefit of geographic diversity and the underlying resilience of the business. Profit before tax rose by 1% to £2.3 million (2018: £2.2 million). Basic earnings were unchanged at 9.16 pence per share while diluted earnings increased 3% to 8.88 pence per share (2018: 8.66 pence). Encouragingly, the Board has recommended a 14% increase in the interim dividend to 2.5 pence per share (2018: 2.2 pence) reflecting confidence in the future.

 

Augean (+110.4%) is one of the UK's leading specialist waste management businesses. In its financial results for the half year ended 30 June 2019, Augean reported a continued recovery in its key markets, with revenues up 40% to £44.2 million (June 2018: £31.6 million) and adjusted profit before tax increasing by 100% to £9.6 million (June 2018: £4.8 million). As a result, net cash grew substantially to £22.8 million (June 2018: £8.2 million). The Board of Augean continues to anticipate that market expectations for the full year will be exceeded. As previously reported, Augean has received landfill tax assessments from HMRC for a total of £34.7 million (£37.3 million including interest) and may receive additional assessments for other time periods until the decision of the Tax Tribunal is known. The initial Tax Tribunal report is expected at some time during 2020. In the meantime, 'hardship' has been awarded, which means that no cash payment will be required to be paid by Augean before the conclusion of the tribunal process. As previously announced, all assessments have been appealed. Augean maintains its position that all landfill tax has been correctly collected and, based on legal advice received, the Board intends to robustly defend the company against all assessments. In view of the legal advice received, no provision has been made against the assessments.

 

Cohort (+33.2%) is the parent company of five technology businesses providing a wide range of services and products for British, Portuguese and International customers in defence & security markets. In a recently released AGM Statement, the Board of Cohort confirmed that the Group continues to make progress. As at 31 August 2019, the Group's order book stood at £210.9 million (compared to £190.9 million at 30 April 2019), which means that 76% of the current financial year's forecast revenue is already covered by firm orders. The growth in the order book is encouraging, while the longer term outlook for Cohort also appears healthy, underpinned by a strong pipeline of order prospects.

 

Keywords Studios (-41.2%) is a provider of technical services to the global video games industry. In its half year to 30 June 2019, revenue, including contributions from acquisitions, increased by 39.3% to €153.2 million (H1 2018: €110.0 million), while like for- like revenue increased by 17.3% to €146.4 million (H1 2018: €124.8 million). Gross profit margin fell to 36.1% (H1 2018: 37.4%) as a result of increased costs associated with a rapid increase in recruitment, more intensive staff training and a significant increase in office facilities. Additional costs were also incurred in servicing a significant project that had been brought into Keywords through an acquisition. Despite these additional costs, profit before tax increased by 14.3% to €18.4 million (H1 2018: €16.1 million), while adjusted earnings per share were broadly flat at €0.18 (H1 2018: €0.18) as a consequence of a higher tax charge. As a sign of confidence in future prospects, the interim dividend was increased by 10% to 0.58p per share (H1 2018: 0.53p). Trading in the second half of Keywords' financial years is reported to have started well.

 

MaxCyte (-49.4%) is a cell-based medicines and life sciences company that has developed a patented, high-performance, cell-engineering platform, which is increasingly being used by biopharmaceutical companies engaged in drug discovery, particularly in the field of cell therapy, gene editing and immuno-oncology. In its financial results for the half year ended 30 June 2019, MaxCyte confirmed continued strong operational progress having signed licences with over 80 cell therapy partners. As a consequence, revenues increased by 21% to c. $8.4 million. As an early stage biotechnology business, MaxCyte remains loss-making having invested significant financial resource into developing its potentially transformational CARMA platform, which is a unique and proprietary form of cell therapy. In February 2019, MaxCyte raised a further £10 million from investors and as at 30 June 2019 the company held $14.9 million in net cash. Although it is anticipated that the company will continue to make progress for the remainder of its current financial year, its share price has suffered due to uncertainty regarding the funding required to successfully commercialise its CARMA technology. The Board of MaxCyte is currently focused on securing a long term solution to this funding requirement.

 

Surface Transforms (+44.1%) is a specialist in the development and production of carbon-ceramic materials and the UK's only manufacturer of carbon-ceramic brakes for automotive use. In Surface Transforms' (ST) financial year ended 31 May 2019, revenues decreased by £0.36 million to £1 million (2018: £1.36 million), while gross margin reduced to 61.6% (2018: 67.4%). Losses after adjustments increased to £1.56 million (2018: £1.38 million). Cash used in operating activities was £2.20 million (2018: £2.17 million), while net cash improved to £1.93 million (2018: £0.92 million), following two successful funding rounds, which raised £3.3 million net. These financial results do not reflect the progress made toward the full commercialisation of ST's advanced ceramic brake products. It was therefore highly encouraging that, post financial year end, ST announced it had been awarded an €11.8 million contract over seven years from a major German automotive manufacturer, as well as a £6 million contract over three years from a British specialist automotive manufacturer. These contract awards have been transformational in the development of the business. ST now has multi-year, multi-million pound revenue contracts and expects to reach break-even point for the first time during calendar year 2020.

 

Tracsis (-10.7%) is a provider of software and services for the rail, traffic data and transportation industry. The results for its financial year ended 31 July 2019 showed revenues had increased by 24% to £49.2 million, adjusted EBITDA increased by 12% to £10.5 million and the dividend for the year increased by 13.1% to 1.8 pence per share. Cash balances remained strong at £24.1 million (2018: £22.3 million), which is after paying c. £9 million in respect of three acquisitions made in the financial year.

 

ULS Technology (-61.3%) is a provider of online technology platforms for the UK conveyancing and financial intermediary markets. Against a difficult market backdrop, the Group has broadly managed to maintain profits while continuing to invest for future growth. In the financial year to 31 March 2019, revenues were down marginally at £30.0 million (FY 2018: £30.7 million), while underlying profit before tax was also slightly lower at £5.4 million (FY 2018: £5.5 million). Net debt increased in the year to £2.9 million (FY 2018: £1.9 million), primarily as a result of continued investment in DigitalMove, which is a new product designed to enable everyone involved in the conveyancing process to communicate and collaborate with each other.The Board of ULS proposed a dividend of 1.20 pence per share taking the total for the year to 2.40 pence per share (FY 2018: 2.30 pence per share). The challenges in the wider UK housing market remain severe, and in September the Board announced that ULS had been unsuccessful in re-tendering for an existing contract. The loss of this contract is expected to have an impact of up to £0.5 million on profit before tax in the financial year ended 31 March 2021. Understandably, the share price experienced further weakness as a result of this announcement, however the Group is in a strong, profitable and cash generative position, and is therefore well positioned for when the housing market picks up.

 

Unquoted Investments

It is pleasing to report that two VCT-qualifying investments in unquoted companies have been the subject of further uplifts to their respective carrying values as a consequence of successful trading and significant growth over the past twelve months. The two companies concerned are Hasgrove and Interactive Investor.

 

Hasgrove (+128.1%) is the name of the holding company under which lies an operating company called Interact. Interact is a Software as a Service business offering state of the art corporate intranets to businesses around the world. The scale and rate of growth in winning new, high value contracts remains impressive. Momentum in the business is being maintained and Interact is now an increasingly profitable and cash generative business having transitioned over the past three years from a Perpetual Licence revenue model to a SaaS model, resulting in rapidly increasing monthly, recurring revenues. As a consequence, the carrying value of the Hasgrove shares in the portfolio has been increased twice during the course of the year under review, from 384 pence per share to 876 pence per share; a total increase of 128%, equating to an unrealised capital gain for the year of £8.2 million.

 

Interactive Investor (+130.9%) is an online investment platform that provides retail investors with independent financial information, together with a trading and portfolio management platform which enables them to self-manage their investments. In the past twelve months, Interactive has completed two major acquisitions and successfully disposed of a non-core asset. The business now has significantly greater scale, is consistently profitable and continues to demonstrate strong growth.

 

At the 2017/18 financial year end, the Company's stake in Interactive was held in the portfolio at a carrying value of £78.40 per share. As a consequence of the successful integration of the first acquisition and subsequent increase in Assets under Administration, the shares of Interactive have been subject to two valuation uplifts during the course of the financial year under review. In recognition of IPEVC Valuation Guidelines, the carrying value of this investment is now measured in comparison with its quoted peer group, with a substantial discount subsequently applied in recognition that Interactive remains a privately held business in which your Company only holds a small minority stake. As at 30 September 2019, the carrying value of the shares was £181.00 per share. This represents an uplift in value of slightly over 130.0% and equates to an unrealised capital gain during the financial year of £8.1 million.

 

Non-Qualifying Investments

(bracketed figures represent the share price movement for the year under review or since the date of investment on a mid-price basis):

 

The non-qualifying investments held by the Company are typically in larger, more liquid quoted companies that are listed on the FTSE 350 Index. Non-qualifying investments are held in the portfolio in lieu of cash, in order to generate additional dividend income for future distribution to Shareholders, while awaiting suitable VCT qualifying investment opportunities. In the main, these investments performed satisfactorily, albeit it has been difficult to generate meaningful capital gains in the period under review, given difficult market conditions. The strongest contributors to performance in total returns terms were; Communisis (+35.1%), GlaxoSmithKline (+6.6%) and Royal Dutch Shell (+4.5%).

In contrast, the three largest detractors from performance were; Babcock, Renold and Victrex, which registered total returns in the period under review of (-18.7%), (-42.5%) and (-30.9%) respectively.

Investment Activity

In terms of new investment activity, the number and quality of available investment opportunities reduced during the course of the year. This reduced level of deal flow could potentially cause problems with regard to the Company's ability to maintain its VCT Status. It is for this reason that the amount of new capital raised under Offers for Subscription is carefully considered. In the tax year to April 2019, the Company successfully raised £24.3 million net of costs, of which £3.7 million has already been deployed in funding VCT qualifying companies. The Investment Manager adopts this cautious approach in order to remain selective with regard to the companies in which it invests.

During the period under review, two new VCT-qualifying investments were made in Phynova and Renalytix AI, at a total cost of £2.5 million.

Phynova is a privately owned life sciences company that develops proprietary natural healthcare products from active compounds found in plants.

Renalytix AI is a business specialising in the development of artificial intelligence enabled, clinical decision tools, designed to improve risk assessment and clinical care in kidney disease, which is currently one of the largest and costliest medical conditions globally.

These businesses appear to be on the cusp of significant growth, although it is important to emphasise that each is at a relatively early stage in development and therefore both businesses may require further financial support before they are able to achieve profitability.

Follow-on investments were made in a number of existing investments, which remained eligible for further State Aided funding. A total of £4.6 million of new capital was allocated to these investee companies in order to help finance their ongoing expansion plans.

In aggregate, almost £20.3 million was raised from the full and partial disposal of a number of holdings during the period. As a reminder, the purpose of such disposals is threefold; to ensure stock specific risk is contained, to lock in capital profits for future distribution to Shareholders via dividend payments and to help manage liquidity requirements.

Given the challenging market conditions experienced in the period under review, together with an uncertain economic and political outlook, it is heartening that our most recent Offer for Subscription was fully subscribed, attracting strong support from both existing Shareholders and new investors. The new monies raised will enable the Investment Manager to continue the established and successful strategy of selectively growing the existing portfolio of investments, while providing much needed capital to emerging 'scale-up' businesses, which, in turn, should create further employment opportunities and, over time, generate meaningful additional tax revenues for HM Treasury.

Realisations

Three AIM-listed companies were acquired during the period; following receipt of takeover approaches. The net proceeds from these realisations amounted to £5.0 million, realising an aggregate capital gain on investment cost of £1.4 million. In recent months, there has been an increase in the level of merger & acquisition activity and it is possible that this trend will continue, especially if the value of Sterling remains relatively weak. A number of other partial disposals in qualifying holdings together with full and partial disposals in non-qualifying investments were also made. These transactions generated total proceeds of £15.3 million and an aggregate capital profit of £4.6 million. The total value of all disposals made during the period therefore amounted to £20.3 million. Including partial disposals, the total realised capital gain from the sale of investments amounted to £6.0 million.

Prospects 

The financial year to 30 September 2019 was challenging for the UK equity market and for the FTSE AIM All-Share Index in particular. The Company has not been immune from these difficulties, despite performance overall proving to be relatively resilient.

The current financial year has begun in similar vein and trading conditions for smaller, domestically focused businesses may remain weak for some time and not improve until it becomes clear how the relationship with the European Union will evolve. As a consequence, investor sentiment towards UK equities is also likely to remain weak for some time to come. This relative undervaluation of UK markets is currently particularly evident in comparison with the US stock market.

In conclusion, there seems little to be gained from speculating on matters outside our control. We therefore remain firmly focused on nurturing the existing portfolio of investments in order to generate healthy returns for Shareholders over the longer term, while simultaneously attempting to avoid too many stock specific disappointments over the shorter term.

As ever, the continued support of our Shareholders is greatly appreciated and we look forward to meeting as many of you as possible at the forthcoming Annual General Meeting, which is to be held at The Charterhouse on 30 January 2020.

 

Chris Hutchinson

Unicorn Asset Management Limited

3 December 2019

EXTRACT FROM DIRECTORS' REPORT

 

Share Capital

At the year-end there were 130,660,071 (2018: 117,226,048) Ordinary shares of 1p each in issue, none of which are held in Treasury. The issues and buybacks of the Company's shares during the year are shown in note 13 on page 59 of the Annual Report. A total of 168,702 shares have been bought back subsequent to the year end, therefore, at the date of this announcement the Company had 130,491,369 shares in issue. All shares are listed on the main market of the London Stock Exchange.

 

Going concern

After due consideration, the Directors believe that the Company has adequate resources for a period of at least 12 months from the date of the approval of the financial statements and that it is appropriate to apply the going concern basis in preparing the financial statements. As at 30 September 2019, the Company held cash balances of £9.4 million, £19.4 million in fully listed stocks and £6.5 million in Unicorn OEIC funds. The majority of the Company's investment portfolio remains invested in non-qualifying, fully listed and partly qualifying, partly non-qualifying, AIM quoted equities which may be realised, subject to the need for the Company to maintain its VCT status. As a result the cash flow projections covering a period of at least twelve months from the date of approving the financial statements have been reviewed and show that the Company has access to sufficient liquidity to meet both contracted expenditure and any discretionary cash outflows from buybacks and dividends. The Company has no borrowings in place and is therefore not exposed to any gearing covenants.

The full Annual Report and Accounts contains the following statement regarding responsibility for the Financial Statements.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Company's Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice ("UK GAAP') (United Kingdom Accounting Standards and applicable law). 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 the Company 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 accounting estimates that are reasonable and prudent;

-     state whether they have been prepared in accordance with UK GAAP subject to any material departures disclosed and explained in the Financial Statements; and

-    prepare a Director's Report, a Strategic Report and Director's Remuneration Report which comply with the requirements of the Companies Act 2006.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are 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 responsible for ensuring that the Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

Website publication

The Directors are responsible for ensuring the Annual Report and the Financial Statements are made available on a website. Financial Statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of Financial Statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the Financial Statements contained therein.

 

Directors' responsibilities pursuant to DTR4

The Directors confirm to the best of their knowledge:

• The Financial Statements have been prepared in accordance with UK GAAP and give a true and fair view of the assets, liabilities, financial position and loss of the Company.

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

 

For and on behalf of the Board

 

 

Peter Dicks

Chairman

3 December 2019

 

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 September 2019 or 30 September 2018 but is derived from those accounts. Statutory accounts for the year ended 30 September 2018 have been delivered to the Registrar of Companies and statutory accounts for the year ended 30 September 2019 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's reports can be found in the Company's full Annual Report and Accounts at www.unicornaimvct.co.uk.

 

PRIMARY FINANCIAL STATEMENTS

 

Income Statement

for the year ended 30 September 2019

 

		Year ended			Year ended
		30 September 2019			30 September 2018
	Notes	Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Net unrealised (losses)/gains on investments		-	(11,102)	(11,102)	-	16,992	16,992
Net gains on realisation of investments		-	650	650	-	1,628	1,628
Income	2	2,700	28	2,728	3,004	-	3,004
Investment management fees	3	(916)	(2,748)	(3,664)	(908)	(2,724)	(3,632)
Other expenses		(772)	-	(772)	(691)	-	(691)
Profit/(loss) on ordinary activities before taxation		1,012	(13,172)	(12,160)	1,405	15,896	17,301
Tax on profit/(loss) on ordinary activities		-	-	-	-	-	-
Profit/(loss) on ordinary activities after taxation for the financial year		1,012	(13,172)	(12,160)	1,405	15,896	17,301
Basic and diluted earnings per share:
Ordinary Shares	5	0.81p	(10.56)p	(9.75)p	1.20p	13.56p	14.76p

 

All revenue and capital items in the above statement derive from continuing operations of the Company.

 

The total column of this statement is the Statement of Total Comprehensive Income of the Company prepared in accordance with applicable Financial Reporting Standards ("FRS"). The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice ("AIC SORP") issued in November 2014 and updated in February 2018 with consequential amendments by the Association of Investment Companies.

 

The Association of Investment Companies has published its October 2019 edition of the AIC SORP which is effective for accounting periods commencing on or after 1 January 2019.

 

Other than revaluation movements arising on investments held at fair value through profit or loss, there were no differences between the profit as stated above and at historical cost.

 

The notes below form part of these financial statements.

 

Statement of Financial Position

as at 30 September 2019

		30 September 2019		30 September 2018
	Notes	£'000	£'000	£'000	£'000
Non-current assets
Investments at fair value	6		192,551		200,052
Current assets
Debtors		426		387
Cash at bank and in hand		9,393		1,279
		9,819		1,666
Creditors: amounts falling due within one year		(1,254)		(290)
Net current assets			8,565		1,376
Net assets			201,116		201,428
Capital
Called up share capital			1,307		1,172
Capital redemption reserve			25		99
Share premium account			13,856		106,325
Capital reserve			65,535		80,152
Special reserve			114,297		7,401
Profit and loss account			6,096		6,279
Equity Shareholders' funds			201,116		201,428
Net asset value per Ordinary share:
Ordinary shares	7		153.92p		171.83p

 

The financial statements were approved and authorised for issue by the Board of Directors on 3 December 2019 and were signed on their behalf by:

 

 

Peter Dicks

Chairman

 

The notes below form part of these financial statements.

 

Statement of Changes in Equity

for the year ended 30 September 2019

 

	Called up share capital	Capital redemption reserve	Share premium account	Unrealised capital reserve	Special reserve*	Profit and loss account*	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 October 2018	1,172	99	106,325	80,152	7,401	6,279	201,428
Shares repurchased for cancellation and cancelled	(32)	32	-	-	(4,430)	-	(4,430)
Shares issued under Offer for Subscription	167	-	24,726	-	-	-	24,893
Expenses of shares issued under Offers for Subscription	-	-	(570)	-	-	-	(570)
Cancellation of Share premium account and Capital redemption reserve	-	(106)	(116,625)	-	116,731	-	-
Transfer to special reserve	-	-	-	-	(5,405)	5,405	-
Gains on disposal of investments (net of transaction costs)	-	-	-	-	-	650	650
Realisation of previously unrealised valuation movements	-	-	-	(3,515)	-	3,515	-
Capital dividend received	-	-	-	-	-	28	28
Net decreases in unrealised valuations in the year	-	-	-	(11,102)	-	-	(11,102)
Dividends paid	-	-	-	-	-	(8,045)	(8,045)
Investment Management fee charged to capital	-	-	-	-	-	(2,748)	(2,748)
Revenue return for the year	-	-	-	-	-	1,012	1,012
At 30 September 2019	1,307	25	13,856	65,535	114,297	6,096	201,116

 

 

	Called up share capital	Capital redemption reserve	Share premium account	Unrealised capital reserve	Special reserve*	Profit and loss account*	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 October 2017	1,076	77	87,090	65,784	13,736	7,743	175,506
Shares repurchased for cancellation and cancelled	(22)	22	-	-	(3,102)	-	(3,102)
Shares issued under Offer for Subscription	118	-	19,714	-	-	-	19,832
Expenses of shares issued under Offer for Subscription	-	-	(479)	-	-	-	(479)
Transfer to special reserve	-	-	-	-	(3,233)	3,233	-
Gains on disposal of investments (net of transaction costs)	-	-	-	-	-	1,628	1,628
Realisation of previously unrealised valuation movements	-	-	-	(2,624)	-	2,624	-
Unclaimed dividends and other income released by Rensburg	-	-	-	-	-	15	15
Net increases in unrealised valuations in the year	-	-	-	16,992	-	-	16,992
Dividends paid	-	-	-	-	-	(7,645)	(7,645)
Investment Management fee charged to capital	-	-	-	-	-	(2,724)	(2,724)
Revenue return for the year	-	-	-	-	-	1,405	1,405
At 30 September 2018	1,172	99	106,325	80,152	7,401	6,279	201,428

 

* The special reserve and profit and loss account are distributable to Shareholders. As detailed in the Chairman's Statement above, the cancellation of the Share premium account and Capital redemption reserve was approved by the Court on 26 March 2019.

 

The notes form part of these financial statements.

 

Statement of Cash Flows

for the year ended 30 September 2019

 

		30 September 2019		30 September 2018
	Notes	£'000	£'000	£'000	£'000
Operating activities
Investment income received		2,657		3,011
Investment management fees paid		(2,691)		(3,648)
Other cash payments		(855)		(787)
Net cash outflow from operating activities			(889)		(1,424)
Investing activities
Rensburg unclaimed dividends and other income		-		15
Purchase of investments		(23,115)		(48,526)
Sale of investments		20,270		24,709
Net cash outflow from investing activities			(2,845)		(23,802)
Net cash outflow before financing			(3,734)		(25,226)
Financing
Dividends paid	4	(8,045)		(7,645)
Shares issued under Offers for Subscription (net of transaction costs)		24,323		19,159
Shares repurchased for cancellation		(4,430)		(3,102)
Net cash inflow from financing			11,848		8,412
Net increase/(decrease) in cash and cash equivalents			8,114		(16,814)
Cash and cash equivalents at 30 September 2018			1,279		18,093
Cash and cash equivalents at 30 September 2019			9,393		1,279

 

The reduced management fee paid reflects the switch from payment in advance to payment in arrears as discussed in note 3.

 

The notes below form part of these financial statements.

 

Notes to the Financial Statements

for the year ended 30 September 2019

 

1    Accounting policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out on pages 51 and 52 of the Annual Report.

 

a)  Basis of accounting

The Financial Statements have been prepared under FRS 102 and the SORP issued by the Association of Investment Companies in November 2014 and updated in February 2018 with consequential amendments. The Association of Investment Companies has published its October 2019 edition of the AIC SORP which is effective for accounting periods commencing on or after 1 January 2019.

 

In accordance with the requirements of FRS 102, those undertakings in which the Company holds more than 20% of the equity as part of an investment portfolio are not accounted for using the equity method. In these circumstances the investment is measured at "fair value through profit or loss". The Company is exempt from preparing consolidated accounts under the investment entities exemption as permitted by FRS 102.

 

The financial statements have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments designated as fair value through profit or loss.

 

As a result of the Directors' decision to distribute capital profits by way of a dividend, the Company revoked its investment company status as defined under section 266(3) of the Companies Act 1985, on 17 August 2004.

 

2        Income

	2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Income from investments:
-  equities	2,432	28	2,460	2,739	-	2,739
-  loan stocks	36	-	36	93	-	93
-  bank interest	16	-	16	8	-	8
-  Unicorn managed OEICs (including reinvested dividends)	216	-	216	164	-	164
Total income	2,700	28	2,728	3,004	-	3,004
Total income comprises:
Dividends	2,648	28	2,676	2,903	-	2,903
Interest	52	-	52	101	-	101
	2,700	28	2,728	3,004	-	3,004
Income from investments comprises:
Listed UK securities	866	-	866	1,152	-	1,152
Unlisted UK securities (AIM and unquoted companies)	1,834	28	1,862	1,852	-	1,852
	2,700	28	2,728	3,004	-	3,004

 

3        Investment Management fees

	2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Unicorn Asset Management Limited	916	2,748	3,664	908	2,724	3,632

 

Unicorn Asset Management Limited ("UAML") receive an annual management fee of 2% of the net asset value of the Company, excluding the value of the investments in the OEICs, up to net assets of £200 million and 1.5% of net assets in excess of £200 million. If the Company raises further funds during a quarter the net asset value for that quarter is reduced by an amount equal to the amount raised, net of costs, multiplied by the percentage of days in that quarter prior to the funds being raised. The annual management fee charged to the Company is calculated and payable quarterly in arrears. In the year ended 30 September 2019, UAML also earned fees of £37,000 (2018: £69,000), being OEIC management fees calculated on the value of the Company's holdings in each OEIC on a daily basis. This management fee is 0.75% per annum of the OEIC value for each of Unicorn UK Smaller Companies OEIC, Unicorn UK Growth OEIC (formerly Unicorn Free Spirit OEIC) and Unicorn UK Ethical Fund OEIC.

 

Until 30 September 2018, the annual management fee was calculated and payable quarterly in advance, at the rate of 2% of the net asset value of the Company, excluding the value of the investments in the OEICs.

 

The management fee will be subject to repayment to the extent that there is an excess of the annual costs of the Company incurred in the ordinary course of business over 2.75% (3.6% until 30 September 2018) of the closing net assets of the Company at the year end. There was no excess of expenses for year 2018/19 or the prior year.

 

4        Dividends

	2019	2018
	£'000	£'000
Amounts recognised as distributions to equity holders in the year:
Interim capital dividend of 2.8 pence (2018: 2.8 pence) per share for the year ended 30 September 2019 paid on 9 August 2019	3,698	3,293
Interim income dividend of 0.2 pence (2018:  0.2 pence) per share for the year ended 30 September 2019 paid on 9 August 2019	264	235
Final capital dividend of 2.5 pence (2018: 2.5 pence) per share for the year ended 30 September 2018 paid on 1 February 2019	2,916	2,972
Final income dividend of 1.0 pence (2018: 1.0 pence) per share for the year ended 30 September 2018 paid on 1 February 2019	1,167*	1,189
Total dividends paid in the year	8,045	7,689
Unclaimed dividends returned	-	(44)
	8,045	7,645

 

The proposed final dividend is subject to approval by Shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

* The amount actually paid in dividends for 2018 differs from that shown in last year's Annual Report as 561,055 shares were bought back between 26 November 2018 and the record date of 11 January 2019. 

 

Set out below are the total income dividends payable in respect of the 2018/19 financial year, which is the basis on which the requirements of Section 274 of the Income Tax Act 2007 are considered.

 

	2019	2018
	£'000	£'000
Revenue available for distribution by way of dividends for the year	1,012	1,405
Interim income dividend paid of 0.2 pence (2018: 0.2 pence)	264	235
Proposed final income dividend of 0.5 pence (2018: 1.0 pence) for the year ended 30 September 2019	652+	1,172

 

+Based on 130,491,369 shares in issue at the date of this announcement.

 

5        Basic and diluted earnings and return per share

	2019	2018
	£'000	£'000
Total earnings after taxation:	(12,160)	17,301
Basic and diluted earnings per share (Note a)	(9.75)p	14.76p
Net revenue from ordinary activities after taxation	1,012	1,405
Revenue earnings per share (Note b)	0.81p	1.20p
Total capital return	(13,172)	15,896
Capital earnings per share (Note c)	(10.56)p	13.56p
Weighted average number of shares in issue during the year	124,761,066	117,250,279

 

Notes

a) Basic and diluted earnings per share is total earnings after taxation divided by the weighted average number of shares in issue during the year.

b) Revenue earnings per share is net revenue after taxation divided by the weighted average number of shares in issue during the year.

c) Capital earnings per share is total capital return divided by the weighted average number of shares in issue during the year.

 

There are no instruments in place that will increase the number of shares in issue in future.  Accordingly, the above figures currently represent both basic and diluted returns.

 

6        Investments at fair value

 

				Unlisted	Unicorn
	Fully	Traded	Unlisted	loan	OEIC	2019	2018
	listed	on AIM	shares	stock	funds	Total	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Opening book cost at 30 September 2018	15,690	95,276	13,859	300	2,215	127,340	99,125
Unrealised gains at 30 September 2018	2,842	68,930	5,737	-	2,642	80,151	65,785
Permanent impairment in value of investments	-	(5,072)	(2,367)	-	-	(7,439)	(7,439)
Opening valuation at 30 September 2018	18,532	159,134	17,229	300	4,857	200,052	157,471
Purchases at cost	12,042	5,840	1,250	-	4,012	23,144	48,551
Sale proceeds	(8,873)	(9,901)	-	-	(1,496)	(20,270)	(24,709)
Net realised gains/(losses)	487	545	-	-	(305)	727	1,747
(Decrease)/increase in unrealised gains	(2,793)	(22,378)	14,620	-	(551)	(11,102)	16,992
Closing valuation at 30 September 2019	19,395	133,240	33,099	300	6,517	192,551	200,052
Book cost at 30 September 2019	19,726	95,312	15,109	300	5,755	136,202	127,340
Unrealised (losses)/gains at 30 September 2019	(331)	44,747	20,357	-	762	65,535	80,151
Permanent impairment in value of investments	-	(6,819)	(2,367)	-	-	(9,186)	(7,439)
Closing valuation at 30 September 2019	19,395	133,240	33,099	300	6,517	192,551	200,052

 

Transaction costs on the purchase and disposal of investments of £77,000 were incurred in the year. These have not been deducted from realised gains shown above of £727,000, but have been deducted in arriving at gains on realisation of investments disclosed in the Income Statement of £650,000.

 

Note: Permanent impairments of £7,439,000 continue to be held in respect of losses on quoted investments held at the year end. There were additional impairments provided for in the year amounting to £1,747,000.

 

Reconciliation of cash movements in investment transactions

The difference between the purchases in Note 6 and that shown in the Cash Flows is £29,000 which represents the reinvested dividends on the Unicorn Ethical Fund.

 

7        Net asset value

	2019	2018
Net Assets	£201,116,000	£201,428,000
Number of shares in issue	130,660,071	117,226,048
Net asset value per share	153.92p	171.83p

 

8        Post balance sheet events

On 15 October 2019, the Company purchased 168,702 ordinary shares of 1 pence each, representing 0.13% of the issued share capital, for cancellation at a total cost of £232,300, equivalent to 137.7 pence per share.

 

On 18 October 2019, Stride Gaming was subject to a takeover. The Company received proceeds of £1.6 million realising a profit of £0.2 million.

 

On 7 November 2019, the Access Intelligence loan stock was repaid in full together with the related interest.

 

9        Capital commitments

On 30 September 2019, the Company made a capital commitment to invest £400,000 in Directa Plus.

10     Shareholder information

Dividend

The Directors have proposed a final dividend of 3.5 pence per share. Subject to Shareholder approval, the dividend will be paid on 6 February 2020 to Shareholders on the Register on 10 January 2020.

 

Shareholders who wish to have future dividends paid directly into their bank account rather than sent by cheque to their registered address can complete a mandate for this purpose. Mandates can be obtained by contacting the Company's Registrar, The City Partnership (UK) Limited.

 

Dividend Reinvestment Scheme

Shareholders may elect to reinvest their dividends by subscribing for new shares in the Company. Shares will be issued at the latest published Net Asset Value prior to the allotment. For details of the scheme see the Company's website www.unicornaimvct.co.uk/dividend-reinvestment-scheme or contact the scheme administrators, The City Partnership, on 01484 240910.

 

11     Statutory information

These are not full accounts in terms of section 434 of the Companies Act 2006. The Annual Report for the year to 30 September 2019 will be sent to Shareholders shortly and will then be available for inspection at Suite 8, Bridge House, Courtenay Street, Newton Abbot TQ12 2QS, the registered office of the Company. Copies of the Annual Report will shortly be available on the Company's website, www.unicornaimvct.co.uk.  Statutory accounts will be delivered to the Registrar of Companies after the Annual General Meeting. The audited accounts for the year ended 30 September 2018 contain an unqualified audit report.

 

12     Annual General Meeting

The Annual General Meeting of the Company will be held on Thursday, 30 January 2020 at 11.30 am at The Great Hall, The Charterhouse, Suttons Hospital, Charterhouse Square, London EC1M 6AN.

 

13     National Storage Mechanism

A copy of the 2019 Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM.

 

Contact details for further enquiries:

Chris Hutchinson of Unicorn Asset Management Limited (the Investment Manager), on 020 7253 0889.

 

Jon Carslake at ISCA Administration Services Limited (the Company Secretary) on 01392 487056 or by e-mail on unicornaimvct@iscaadmin.co.uk 

 

DISCLAIMER

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.