Company Announcements

Amati AIM VCT plc (the "Company")

Legal Entity Identifier: 213800HAEDBBK9RWCD25

Half-yearly Report for the six months ended 31 July 2023

Highlights

Investment Objective

The investment objective of Amati AIM VCT plc (the "Company") is to generate tax free capital gains and income on investors' funds, through investment primarily in AIM-traded companies. The Company will manage its portfolio to comply with the requirements of the rules and regulations applicable to Venture Capital Trusts. The Company's policy is to hold a diversified portfolio across a broad range osectors to mitigate risk.

Dividend Policy

The Board aims to pay annual dividends of around 5% of the Company's Net Asset Value at its immediately preceding financial year end, subject to distributable reserves and cash resources and with the authority to increase or decrease this level at the directors' discretion.

Key Data

* Numis Alternative Markets Index is included as a comparator benchmark for performance as this index includes all companies listed on qualifying UK alternative markets

** Ongoing charges calculated in accordance with the Association of Investment Companies' ("AIC's") guidance

Table of investor returns to 31 July 2023

*Date of the share capital reconstruction when the NAV was re-based to approximately 100p per share.

A table of historic returns is included below.

Chairman's Statement

Overview

In the first half of 2023, markets continued to be hostile for early-stage businesses on AIM, especially for those requiring to raise further capital. In addition, the sharp rise in interest rates and inflationary environment have created more difficult trading conditions for some of the larger, more mature companies. Consequently, this has impacted negatively on performance, with several of the larger holdings in the portfolio being de-rated.

The number of companies raising money on AIM was much reduced, as often happens during periods of market stress. However, £8.8m was invested in new qualifying investments during the period. This was across a mixture of IPO and secondary fund raises on AIM, including three small follow-on investments into companies already held, and one investment in a pre-IPO company. Details of these investments are provided in the Fund Manager's Review. Cash levels have remained high as the Manager made some sales from the qualifying portfolio, amounting to £8.3m. Cash is being actively managed with exposure to both money market funds and interest-bearing bank deposits, in order to maximise income whilst new investments are being sought.

Investment Performance and Dividend

The NAV total return for the period was -14.6%, which compares to a return of -11.3% for the Numis Alternative Markets Index. Full details are provided in the Fund Manager's Review.

The Board aims to pay annual dividends of around 5% of the Company's Net Asset Value at its immediately preceding year end, subject to the Company's available distributable reserves and cash resources, and with the authority to increase or decrease this level at the Directors' discretion. In line with this, the Board is declaring an interim dividend of 2.5p per share, to be paid on 24 November 2023 to shareholders on the register on 20 October 2023. The ex-dividend date will be 19 October 2023.

Corporate Developments

In June, the Company held its AGM and the Manager's Investor Afternoon for a second year at Barber-Surgeons' Hall. The day was well attended and a recording of the event remains available to view on the Manager's website at: https://www.amatiglobal.com/storage/1203/Amati-AIM-VCT-Annual-Report.pdf.

With cash levels remaining high and the rate of new investments still running at relatively low levels, the Board is not planning to raise funds in the current financial year, although the Dividend Re-investment Scheme (DRIS) remains open to shareholders who wish to make use of it. The last day for the Dividend Re-investment Scheme elections will be 8 November 2023.

VCT Legislation

The current VCT legislation contains a "Sunset Clause" which effectively brings income tax relief to an end for new subscriptions after 5 April 2025. This was agreed in 2015 by the UK government to secure ongoing EU approval of the VCT and EIS schemes, which have been a crucial source of funding for new and innovative businesses in the UK. It has always been the case that the extension of the scheme was bound up with the resolution of issues around the Northern Ireland Protocol and potentially achieving a further ratification of the schemes from the EU, so that they can also continue to operate in Northern Ireland after 2025.

The Chancellor of the Exchequer had previously set out an intention to continue the scheme and the subsequent publication of the Windsor Framework on 27 February 2023 left the removal of the Sunset Clause solely within the control of HM Treasury. Since then, there have been no updates from the Government, but on 24 July 2023, the Treasury Committee published its Report on Venture Capital calling for the Government to take urgent action to detail and implement an extension. The Report contained other recommendations around continued support for the VCT and EIS sectors to encourage greater social inclusion within the Venture Capital sector.

Outlook

Whilst the high rate of inflation in the UK now seems to be easing, the rapid rise in interest rates during 2023 has tightened liquidity conditions everywhere. This now requires a period of adjustment, as market prices respond to what has been a very abrupt end to the era of cheap money amidst the advent of war, potential shortages of natural resources and a rising wave of sanctions on international trade. None of this lessens the need for innovative new businesses to underpin the future growth of the economy and maintain competitiveness. However, it makes it harder for such businesses to find funding and tends to slow down sales cycles, making it more expensive for them to scale up. This makes the role of VCTs more important than ever, being pools of capital which are able to continue to invest in tougher times and support businesses over the longer term. The need for clarity on the future of VCT schemes is becoming ever more critical. Tougher markets also tend to be good for the long run returns from new investments, so it is to be hoped that the ability to continue investing will stand the Company in good stead in the years to come. It is encouraging that new opportunities for qualifying investments are appearing on AIM, albeit in smaller numbers than previously.

Fiona Wollocombe

Chairman

5 October 2023

For any matters relating to your shareholding in the Company, dividend payments, or the Dividend Re-investment Scheme, please contact The City Partnership on 01484 240 910, or by email at registrars@city.uk.com. For any other matters please contact Amati Global Investors ("Amati") on 0131 503 9115 or by email at info@amatiglobal.com.

Amati maintains an informative website for the Company - www.amatiglobal.com - on which monthly investment updates, performance information, and past company reports can be found.

Fund Manager's Review

Market Review

Russia's ongoing invasion of Ukraine and the daily horrors it brings continues to weigh on investor sentiment, with additional concerns about the ongoing potential for China to become more bellicose and for Russia to continue to provoke political mayhem in its spheres of influence abroad. In stock markets, headlines have been dominated by the global fight against inflation with the US Federal Reserve, the European Central Bank and the Bank of England all simultaneously continuing to increase interest rates rapidly from historically low levels. This 'normalisation' of policy created a number of disruptions along the way. There was a notable bump in the road in the US banking system with the collapse of SVB Bank in March, closely followed by First Republic Bank and Signature Bank. Of even greater importance was the subsequent unravelling of Credit Suisse. However, the contagion effects of these failures have been limited, with UBS riding to the rescue of Credit Suisse and the US banks being bailed out by larger, better capitalised institutions.

In this tightening environment government bond yields have continued to rise globally, most notably in the US and the UK, where interest rate rises have been most pronounced. The outlook for global growth has deteriorated somewhat but most major economies are bumping along the bottom and recession has largely been avoided so far. The most notable change has been a marked deterioration in Chinese growth prospects and this has led to falls in commodities such as copper and iron ore. Other key commodities such as gold and oil have been broadly flat in the period.

In recent months there has been some evidence that inflation is now being brought under control, with the June G20 inflation rate having fallen to 4.6%. The economic picture in the UK remains more troubled and we continue to lag behind other leading economies in the battle against inflation. However, the trend is finally heading in the right direction, with key indicators such as the Price Producer Index, food, construction materials and money supply all beginning to head firmly downwards. Indeed, many commentators now believe that Prime Minister Sunak will achieve his wish of sub-5% inflation before the end of 2023. Investor anxiety over rising interest rates has also begun to reduce somewhat, with rate expectations now beginning to roll over. Gilt yields have risen back to levels that we saw during the mini Budget crisis of last September. While rising yields have supported a steady recovery in sterling against both the Euro and the US Dollar, this time around fiscal credibility has been maintained albeit government finance is under pressure.

Global markets have recovered their poise in 2023, focused on strong rallies in the handful of the world's largest tech companies listed in the US. By contrast, the UK equity market remained in the doldrums with the FT All Share index returning a paltry 0.6% over the period. AIM continues to lag significantly, falling by 11% over the six months, reflecting ongoing risk-aversion and tougher trading conditions slowing down the growth of the more mature companies. Liquidity at the lower end of the UK market remains somewhat problematic and market sentiment towards UK equities is fragile. There were continued outflows from open-ended UK equity funds, continuing the weak trend of recent years, and there are considerable challenges in re-establishing the UK market as an attractive place for companies to list and raise capital. However, we do detect a greater commitment from the Chancellor, the FCA and others to address these increasingly urgent problems.

Performance Review

Over the first half of the year the NAV Total Return fell by 14.6%, underperforming its benchmark which declined by 11.3%.

An environment of limited risk appetite amongst investors continued to affect stock market liquidity, and this disproportionately impacted share prices for even the largest capitalisation companies within the portfolio. This was the case for our biggest holding, video gaming services provider Keywords Studios ("Keywords"), which fell by 38% in the period despite reporting 10%  organic growth and stable margins in its first half trading update at the end of the period,  expecting this to continue in its second half. This followed concerns that Generative Artificial Intelligence ("GenAI"), a technology for machine-created data content such as text, images, sounds and animation, could be a significant disruptor to the company's creative, testing and localisation businesses. The shares have been sold short by some hedge funds. It is too early to tell exactly how GenAI will impact the video games industry, given the complex legal issues around IP ownership, but it is likely that Keywords will be well placed to adopt the best practices and unlikely that GenAI will lead to such efficiency gains that the market for the kinds of outsourced services that Keywords provides diminishes. Another holding impacted by GenAI fears was digital learning and talent management specialist Learning Technologies, where machine-created education is seen by some as a competitive threat. A greater influence on the share price, however, has been a slowdown in project-based and transactional work amongst the company's financial services and technology clients. On the other hand, longer term contracts and Software-as-a-Service ("SaaS") revenues have proven more robust in softer economic conditions. The shares fell by 47%.  Whilst GenAI will undoubtedly have an eventual impact across the whole economy, the precise business winners and losers from this technology will likely emerge gradually, as was the case with the dot.com revolution more than twenty years ago.

Polarean Imaging, the medical imaging specialist, which finally received FDA approval for its drug device combination product, XENOVIEW, last December, is pursuing a strategy of strategic partnerships with pharmaceutical companies, magnetic resonance imaging specialists, and Contract Research Organisations, in order to fund commercial applications for its technology. This will require additional equity funding, and this acted as an overhang on the company's shares which fell by 50% in the period.

Other negative contributors included recently floated EnSilica and Northcoders. Ensilica specialises in the design and supply of Application Specific Integrated Circuits ("ASICs") to a range of automotive, satellite and industrial automation customers. After a successful listing in May of last year, the shares initially outperformed on the back of a series of contract awards. This new business run rate exceeded original expectations, which prompted a follow-on, non-qualifying placing in March to raise working capital. The placing discount has since acted as a cap on the share price, which fell by 36% across the period. Northcoders provides training courses for IT novices and junior software engineers, in a UK market where there is an acute shortage of coders and developers. Recent interim results show revenues up over 50%, driven by a number of contracts with large corporate clients, plus further funding secured from the Department for Education. This provides good forward visibility to the business. The share price peaked late last year but has subsequently retrenched, falling 37% in the period driven by limited liquidity and some small selling.

Other weak performances included Velocys, the sustainable fuels technology company, which fell by 65% as its shares suffered headwinds from ongoing discussions to raise additional funding for its US manufacturing facility. Whilst over £6m was raised in June, a larger amount of £12m from a strategic investor is still to be finalised; Eneraqua Technologies, a supplier of specialist energy and water efficiency solutions, fell by 62% having missed its forecast revenues for financial year 2023 but still reported a more than 50% increase year on year. The miss was caused by local authority and housing association clients re-prioritising their capital budgets due to expensive fire cladding commitments. This meant some larger utility replacement projects were pushed into 2024, but they were not cancelled; and Aptamer, a developer of custom binders for the life sciences industry, which sought additional funding as customers delayed research projects and ambitious forecasts for revenues moved out of reach. This funding was completed late in the period, but poor investor appetite for loss-making companies saw the shares fall by 96%. In February, having realised that unquoted company Flylogix was unlikely to resolve its operational issues with flying drones out over the North Sea for methane emissions testing, we agreed with the company and BP Ventures, the other principal investor in the business, that the company be put into administration in order to protect  the cash remaining on the balance sheet. We expect this to return 20-25% of our investment and wrote the equity and loan down accordingly.

The greatest positive contributor over the period was autonomous vehicle specialist, Aurrigo International ("Aurrigo"). A successful flotation last September was followed up with positive operational news. An initial agreement with Singapore's Changi Airport to develop baggage handling technology has progressed to a formal partnership to trial and test prototype Auto-Dolly and Auto-Dolly Tug vehicles, together with Auto-Sim airport simulation software. This multi-year partnership will allow Aurrigo to showcase its technology to other airports and provides a solid platform for future growth. The rapid recovery of global aviation to almost pre-pandemic activity levels, is driving demand for efficiencies, decarbonisation, and solutions to staff shortages, all issues which Aurrigo's products address. The company's original business in automotive engineering design continues to generate solid revenues. The shares gained 56%.

Following a disappointing period of trading, video games developer and publisher Frontier Developments rebounded with its shares rising 21% in the period. A full year update in June, whilst in line with previous downgraded guidance, incorporated better performance from the existing games portfolio. However, a strategic decision was taken to cease all third-party title publishing after poor results, and an exceptional charge for this caused an overall loss. Frontier is now returning to its core business of in-house games development and has two significant releases scheduled; a Formula 1 Manager game and a real-time strategy game based on the Warhammer Age of Sigmar IP.

SRT Marine Systems ("SRT"), the provider of maritime surveillance, monitoring and management systems, made several contract announcements during the period and achieved an oversubscribed non-qualifying capital raise to fund working capital. With applications in law enforcement, search & rescue, fisheries management and environmental monitoring, SRT has a growing order book. The shares rose by 20%.

Other positive contributors included Glantus, the accounts payable analytics software provider, which announced improved trading and then a private equity bid approach, and its shares rose by 111%; Equals, the FX payment services specialist, which continues to trade strongly as it shifts its focus from consumer to business customers, generating stronger growth and higher margins and which saw its shares rise by 16%; Kinovo, the provider of property services to the social housing sector, saw its shares rise by 30% having announced several contract wins involving energy efficiency, fire safety, electrical wiring and related building works; and Creo Medical, the surgical endoscopy device specialist, whose technology is seeing increasing adoption helped by an oversubscribed, non-qualifying fund raise in February, in which the TB Amati UK Listed Smaller Companies Fund participated. Its shares rose by 64%.

Portfolio Activity

Over the course of the period under review, the Company made four new investments and three follow-on investments. The new investments comprised one Initial Public Offering ("IPO"), one pre-IPO investment and two investments into companies already quoted on AIM.

The Company participated in the flotation of Fadel Partners, a developer of cloud-based software for brand compliance and royalties' management. Fadel's customers are licensors and licensees across a range of markets covering media, entertainment, publishing, consumer brands and technology. The products incorporate sophisticated image and video recognition powered by AI search tools. The business is long established, and has been recently profitable, but is now entering a new growth phase which will involve losses as it moves to build substantial global revenues. An unquoted investment was made in 2 Degrees, alongside Maven Capital Partners. The company provides large corporates and their suppliers with an online SaaS platform to measure, manage and reduce carbon within supply chains, thereby helping to achieve the Green House Gas Protocol Scope 3 emissions standard. The platform includes a planning tool and AI-driven recommendations for best practices to reduce carbon. Current markets are in food retail and automotive, with significant scope to grow beyond this.

Investments through secondary placings in existing AIM companies involved Itaconix and Cordel. The former is a US developer of a plant-based polymer used to decarbonise everyday consumer products. The company has been on AIM since 2012, but only achieved commercial breakthrough in 2020 with a bio-polymer ingredient for dishwasher detergent. Close to 150 consumer products now use Itaconix ingredients, involving major retailers such as Amazon, Walmart, Aldi and Tesco. With opportunities to grow into personal hygiene and beauty products, the company is forecast to breakeven in its current financial year. Cordel floated on AIM in 2018, and a year later acquired its current business activity which is an AI analytical software platform to automate inspection and management of rail infrastructure. Using highly accurate Light Detection and Ranging sensors mounted onto train rolling stock, the technology replaces human surveying of vegetation infringements, infrastructure clearances, crossings, drainage and ballast, in order to meet regulatory requirements and prevent accidents. Commercial success to date includes contracts with Network Rail, Angel Trains and Amtrak. The company is forecast to breakeven in the current financial year.

A total of £7.9m was invested in these new investments in the period. Three follow-on investments,  totalling £0.9m, were made in antibody developer Fusion Antibodies, fire safety product specialist  Zenova, and sustainable biopesticides formulator Eden Research. In each case, these were part of institutional placings to provide working capital. The position in Amryt Pharmaceuticals was sold following the recommended offer in January by Chiesi Farmaceutici S.p.A. to acquire the company. Angle, the liquid biopsy developer, was also sold on concerns that its technology could be superseded by alternative circulating tumour DNA diagnostics. The share price has fallen materially since then. After strong performance from the shares, the opportunity was taken to reduce our large holding in AB Dynamics, the designer and supplier of testing and simulation technology to the automotive industry. This crystallised £1.6m in gains. Allergy Therapeutics, Bonhill, Falanx and Itsarm (formerly In the Style) were all exited as they had become sub-scale positions.

Outlook

Post the period end, AIM has continued to exhibit weakness, as markets remain wary about the near-term trajectory of key economic indicators. Whilst investors continue to fear the impact of an overtightening of interest rates by central banks, the current picture in the UK is one of moderating inflationary pressures, broadly robust employment levels, and better than anticipated GDP growth. There have also been some signs of a return of bid activity, but the dead hand of sustained redemptions from UK equity funds continues to negatively impact stock market liquidity and momentum.

With almost all yardsticks pointing to the relative undervaluation of smaller companies within the UK market, and the UK's cheapness in a global context, alongside concerns about falling IPO activity, there are growing demands for policy measures to improve the attractiveness of a UK listing. This has resulted in the Chancellor's recent call for defined contribution pension funds to allocate at least 5% to unlisted equities (the definition of which includes AIM quoted stocks) by 2030. More detail on this will be contained within the Chancellor's Autumn Statement, but there is the potential for this reform to create a structural flow of investor funds into smaller UK public equities. Should this measure become more targeted and emphasise the UK government's priorities towards growth sectors such as technology, life sciences and renewables, then it might prove beneficial to the Company's investment universe.

In early August, the Company made two further material investments involving the IPO of an engineering oil sensor developer, Tan Delta, and a follow-on placing in existing holding, Velocity Composites, to fund working capital for its growing pipeline of contracts to supply advanced aircraft material. This is an encouraging start to the second half of the year and continues to utilise the available cash balance within the portfolio. Whilst weak stock market conditions are a headwind to investment performance, they also provide attractively valued opportunities for the Company to continue backing innovative growth companies.

Dr Paul Jourdan, David Stevenson and Scott McKenzie

Amati Global Investors

5 October 2023

Investment Portfolio

as at 31 July 2023

The Company's assets consist of equity (66%), fixed interest investments including convertible loan notes (2%), money market funds (23%) and cash (9%). Its principal risks include investment risk,  venture capital approval risk, compliance risk, internal control risk, financial risk, economic risk, operational risk and concentration risk. These risks and the ways in which they are managed are described in Principal and Emerging Risks and notes 15 to 18 to the Financial Statements in the Company's Report and Financial Statements for the year ended 31 January 2023. The war between Russia and Ukraine continues to cause economic uncertainty. Ongoing high levels of inflation and increased interest rates aimed at reducing inflation cause stress to investee companies and affect the ability of companies to raise finance in the market. The Company's principal and emerging risks have not changed materially since the date of that report.

Going Concern

The condensed financial statements have been prepared on a going concern basis (Note 2 below).

Statement of Directors' Responsibilities

in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·    the condensed set of financial statements which has been prepared in accordance with FRS 104 "Interim Financial Reporting" gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·    the Chairman's Statement and Fund Manager's Review (constituting the interim management report) include a true and fair review of the information required by DTR4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;

·    the Statement of Principal and Emerging Risks above is a fair review of the information required by DTR4.2.7R, being a description of the principal risks and uncertainties for the remaining six months of the year; and

·    the financial statements include a fair review of the information required by DTR4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last annual report that could do so (Note 10 below).

For and on behalf of the Board

Fiona Wollocombe

Chairman

5 October 2023