TIDMNTV
23 NOVEMBER 2022
NORTHERN 2 VCT PLC
UNAUDITED INTERIM FINANCIAL REPORT
FOR THE SIX MONTHSED 30 SEPTEMBER 2022
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by
Mercia Fund Management Limited. It invests mainly in unquoted
venture capital holdings and aims to provide long-term tax-free
returns to shareholders through a combination of dividend yield and
capital growth.
Financial highlights (comparative figures as at 30 September
2021 and 31 March 2022)
Six months ended Six months ended Year ended
30 September 30 September 31 March
2022 2021 2022
---------------- ---------------- -----------
Net assets GBP113.1m GBP112.7m GBP104.9m
Net asset value per share 60.2p 69.2p 64.4p
Return per share:
Revenue (0.2)p 0.2p 0.2p
Capital (2.4)p 3.2p 0.4p
Total (2.6)p 3.4p 0.6p
Dividend per share declared
in respect of the period 2.0p 2.0p 3.6p
Cumulative returns to shareholders
since launch:
Net asset value per share 60.2p 69.2p 64.4p
Dividends paid per share* 134.0p 130.4p 132.4p
Net asset value plus dividends paid per share 194.2p 199.6p 196.8p
Mid-market share price at end of period 58.0p 64.0p 61.5p
Share price discount to net asset value 3.7% 7.5% 4.5%
Annualised tax-free dividend yield (based on net asset
value per share)**
Excluding special dividend 5.2% 5.4% 5.0%
Including special dividend N/A 11.7% N/A
*Excluding interim dividend not yet paid
**The annualised dividend yield is calculated by dividing the
dividends in respect of the 12 month period ended on each reference
date by the net asset value per share at the start of the
period.
Enquiries:
James Sly / Sarah Williams, Mercia Asset Management PLC -- 0330
223 1430
Website:
https://www.globenewswire.com/Tracker?data=fmvboF5i_300yIg90Ll_70HJmCtjGqWXEbSkPtp-A0XuIrphJHWV_Z_h08JIy6h-8yvHeDiepzrBApk7XTOBVIhPO8e3WHvQKNpC2J8bHpU=
www.mercia.co.uk/vcts
INTERIM MANAGEMENT REPORT TO SHAREHOLDERS
FOR THE SIX MONTHSED 30 SEPTEMBER 2022
While the economic climate, dominated by supply side shortages,
inflationary pressures and political turmoil, has introduced
volatility into the financial markets, your company has continued
to invest in early stage companies, support existing portfolio
companies and generate returns from realisations.
The proceeds of portfolio investments sold during the period
totalled GBP3.6 million, compared with an initial cost of GBP1.8
million. Investment activity continued in the period, with GBP4.4
million invested across 10 existing and new portfolio companies,
and a further GBP4.2 million invested since the end of the
reporting period. The cash generated from investment disposals, in
combination with the proceeds from the 2021/22 fully subscribed
GBP17.0 million public share offer, has resulted in your company
being well positioned to pursue new opportunities.
Investment portfolio
The prevailing macroeconomic conditions have been challenging
for some of our portfolio companies, with valuations of companies
in some sectors reducing on the prospect of lower consumer
disposable income, higher interest rates and increases in raw
materials and labour costs. Your directors take great care when
considering the valuations of the unquoted venture portfolio and
whenever necessary have reflected the uncertain market conditions
in the valuations as at 30 September 2022.
Over the course of 2022 quoted markets have reacted to the
economic situation by falling from the highs seen in 2021. The
quoted portfolio ended the six month period GBP3.0 million lower
than March 2022, a 25% fall. This lower figure was predominantly
due to musicMagpie plc, where the valuation of the AIM listed
shares held following our partial realisation at IPO fell by
GBP1.6m. Notwithstanding this reduced value, the combined realised
and unrealised lifetime return on cost from our investment in
musicMagpie plc was 6.6 times as at 30 September 2022.
We have continued to see positive realisations from portfolio
companies. So far this financial year we have disposed of our
holding in an early stage investment, Knowledgemotion, for initial
net proceeds of GBP3.0 million, representing 1.7 times return on
the original cost, and one of our listed holdings, Ideagen, for net
proceeds of GBP429,000, versus an original cost of GBP42,000.
Results and dividend
The unaudited net asset value (NAV) per share on 30 September
2022 was 60.2 pence (64.4 pence (audited) on 31 March 2022) and is
stated after deducting the final dividend of 1.6 pence per share in
respect of the 2021/22 financial year, which was paid in August
2022. The return per share as shown in the income statement for the
six months ended 30 September 2022 was minus 2.6 pence, compared
with 3.4 pence in the corresponding period last year.
Investment income fell to GBP146,000 from GBP835,000 during the
same period last year, reflecting the disposal of higher yielding
income investments as the portfolio mix continued to pivot towards
earlier stage venture capital opportunities, following the 2015
change to the definition of VCT qualifying assets. Income from our
liquid cash portfolio is expected to rise over the next year, as
the increase in the Bank of England base rate filters through.
After careful consideration, the board has declared an unchanged
interim dividend for the year ending 31 March 2023 of 2.0 pence per
share, which will be paid on 13 January 2023 to shareholders who
are on the register on 9 December 2023. It remains our objective to
pay a dividend at least equivalent to 5% of the opening NAV in each
year.
Shareholder issues
As a result of the fully subscribed public share offer launched
in January 2022, 25,597,510 new ordinary shares were issued in
April 2022 for gross proceeds of GBP17.0 million.
Our dividend investment scheme, which enables shareholders to
invest their dividends in new ordinary shares free of dealing costs
and with the benefit of the tax reliefs available on new VCT share
subscriptions, continues to operate, with around 14% of total
dividends reinvested by shareholders during the year.
We are experiencing a sustained demand for long-term growth
capital for smaller companies in the UK. In order to continue to
support our existing portfolio through challenging economic
conditions and invest in new early stage opportunities, we announce
our intention to fundraise in the 2022/23 and 2023/24 tax years in
conjunction with the other Northern VCTs. Full details of how to
participate in the up to GBP6 million 2022/23 fundraise will be
published in January 2023.
We have maintained our policy of being willing to buy back the
company's shares in the market when necessary in order to maintain
liquidity, at a 5% discount to NAV. During the period, a total of
1,529,356 shares were repurchased for cancellation, equivalent to
approximately 0.9% of the opening share capital.
VCT qualifying status and legislation
The company has continued to meet the stringent qualifying
conditions laid down by HM Revenue & Customs for maintaining
its approval as a VCT. Our investment manager monitors the position
closely and reports regularly to the board. Philip Hare &
Associates LLP has continued to act as independent adviser to the
company on VCT taxation matters.
We welcomed the UK Government's announcement of its commitment
to the extension of the VCT sunset clause beyond the existing 2025
deadline. The 'sunset clause' was a European state aid requirement
when the VCT scheme received state aid approval in 2015, requiring
a small change in UK legislation to enable VCT investors to
continue to receive upfront tax relief after April 2025. The Board
considers that the company, and VCTs more generally, are
successfully delivering against the government's mandate, which is
to channel money into higher-risk, early-stage businesses. Mercia
is represented on the relevant committees of the various trade
bodies, working to continue to demonstrate to government the
positive contributions that VCTs play in society.
Given the current political climate it is possible that further
changes will be made in the future. We will continue to work
closely with Mercia to maintain compliance with the scheme rules at
all times.
Outlook
While macroeconomic conditions continue to cause considerable
uncertainty and challenges for early stage businesses, your company
is well-capitalised and continues to invest in a strong pipeline of
exciting opportunities. We will continue to work with our
investment manager to support our existing portfolio, taking
opportunities as they arise to realise returns for shareholders.
Your company is invested in a diversified portfolio of businesses
with medium-term prospects in which we remain confident.
The board very much appreciates the continuing support of
shareholders.
On behalf of the board
David Gravells
Chair
INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2022
Cost Valuation % of net assets
GBP000 GBP000 by valuation
Fifteen largest venture capital
investments:
Evotix (formerly SHE) 2,518 8,751 7.7%
Lineup Systems 975 7,267 6.4%
Volumatic Holdings 216 3,360 3.0%
Grip-UK (t/a Climbing Hangar) 3,213 3,213 2.8%
Newcells Biotech 2,257 2,564 2.3%
Gentronix 1,164 2,166 1.9%
Biological Preparations Group 2,166 2,082 1.8%
Rockar 1,716 1,929 1.7%
Clarilis 1,828 1,921 1.7%
Tutora (t/a Tutorful) 1,843 1,733 1.6%
Enate 1,394 1,595 1.5%
Project Glow Topco (t/a
Currentbody.com) 1,544 1,544 1.4%
Netacea 1,361 1,524 1.3%
Fresh Approach (UK) Holdings 1,454 1,402 1.2%
Broker Insights 1,318 1,320 1.2%
---------- ---------- -------
Fifteen largest venture capital
investments 24,967 42,371 37.5%
Other venture capital investments 37,893 24,362 21.5%
---------- ---------- -------
Total venture capital investments 62,860 66,733 59.0%
Listed equity investments 6,224 6,728 5.9%
Listed interest-bearing investments 1,523 1,306 1.2%
---------- ---------- -------
Total fixed asset investments 70,607 74,767 66.1%
----------
Net current assets 38,343 33.9%
---------- -------
Net assets 113,110 100.0%
---------- -------
*Quoted on AIM
Extracts from the unaudited interim financial statements for the
six months ended 30 September 2022 are set out below.
INCOME STATEMENT
(unaudited) for the six months ended 30 September 2022
Six months ended Six months ended
30 September 2022 30 September 2021
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Gain on
disposal of
investments - 126 126 - 1,194 1,194
Movements in
fair value
of
investments - (3,887) (3,887) - 4,731 4,731
---------- ---------- ---------- ---------- ---------- ----------
- (3,761) (3,761) - 5,925 5,925
Income 146 - 146 835 - 835
Investment
management
fee (248) (745) (993) (274) (822) (1,096)
Other
expenses (246) - (246) (222) - (222)
---------- ---------- ---------- ---------- ---------- ----------
Return
before tax (348) (4,506) (4,854) 339 5,103 5,442
Tax on
return - - - (33) 33 -
---------- ---------- ---------- ---------- ---------- ----------
Return after
tax (348) (4,506) (4,854) 306 5,136 5,442
---------- ---------- ---------- ---------- ---------- ----------
Return per
share (0.2)p (2.4)p (2.6)p 0.2p 3.2p 3.4p
Year ended 31 March 2022
Revenue Capital Total
GBP000 GBP000 GBP000
Gain on disposal of investments - 4,491 4,491
Movements in fair value of investments - (2,265) (2,265)
---------- ---------- ----------
- 2,226 2,226
Income 1,314 - 1,314
Investment management fee (541) (1,621) (2,162)
Other expenses (455) - (455)
---------- ---------- ----------
Return before tax 318 605 923
Tax on return (3) 3 -
---------- ---------- ----------
Return after tax 315 608 923
---------- ---------- ----------
Return per share 0.2p 0.4p 0.6p
BALANCE SHEET
(unaudited) as at 30 September 2022
30 September 2022 30 September 2021 31 March 2022
GBP000 GBP000 GBP000
Fixed assets:
Investments 74,767 86,164 77,878
---------- ---------- ----------
Current assets:
Debtors 60 297 43
Cash and cash equivalents 38,371 26,349 27,086
---------- ---------- ----------
38,431 26,646 27,129
Creditors (amounts
falling due
within one year) (88) (94) (153)
---------- ---------- ----------
Net current assets 38,343 26,552 26,976
---------- ---------- ----------
Net assets 113,110 112,716 104,854
---------- ---------- ----------
Capital and reserves:
Called-up equity share
capital 9,388 8,150 8,145
Share premium 37,658 21,490 21,952
Capital redemption
reserve 692 570 615
Capital reserve 61,151 61,946 63,642
Revaluation reserve 4,160 19,434 9,765
Revenue reserve 61 1,126 735
---------- ---------- ----------
Total equity
shareholders' funds 113,110 112,716 104,854
---------- ---------- ----------
Net asset value per share 60.2p 69.2p 64.4p
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2022
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2022 8,145 21,952 615 9,765 63,642 735 104,854
Return after
tax - - - (5,605) 1,099 (348) (4,854)
Dividends
paid - - - - (2,682) (326) (3,008)
Net proceeds
of share
issues 1,320 15,706 - - - - 17,026
Shares
purchased for
cancellation (77) - 77 - (908) - (908)
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 30
September
2022 9,388 37,658 692 4,160 61,151 61 113,110
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF CHANGES IN EQUITY
for the six months ended 30 September 2021
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2021 8,102 20,175 511 22,343 63,547 822 115,500
Return after
tax - - - (2,909) 8,047 304 5,442
Dividends
paid - - - - (8,855) - (8,855)
Net proceeds
of share
issues 107 1,315 - - - - 1,422
Shares
purchased for
cancellation (59) - 59 - (793) - (793)
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 30
September
2021 8,150 21,490 570 19,434 61,946 1,126 112,716
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2022
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2021 8,102 20,175 511 22,343 63,547 822 115,500
Return after
tax - - - (12,578) 13,186 315 923
Dividends
paid - - - - (11,703) (402) (12,105)
Net proceeds
of share
issues 147 1,837 - - - - 1,984
Shares
purchased
for
cancellation (104) (60) 104 - (1,388) - (1,448)
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 March
2022 8,145 21,952 615 9,765 63,642 735 104,854
---------- ---------- ---------- ---------- ---------- ---------- ----------
*The revaluation reserve is generally non-distributable other
than that part of the reserve relating to gains/losses on readily
realisable quoted investments, which is distributable.
STATEMENT OF CASH FLOWS
(unaudited) for the six months ended 30 September 2022
Six months ended Six months ended Year ended
30 September 2022 30 September 2021 31 March 2022
GBP000 GBP000 GBP000
Cash flows from operating
activities:
Return before tax (4,854) 5,442 923
Adjustments for:
Gain on disposal of
investments (126) (1,194) (4,491)
Movement in fair value of
investments 3,887 (4,731) 2,265
(Increase)/decrease in
debtors (17) 1,365 1,619
(Decrease)/increase in
creditors (65) (1,713) (1,654)
---------- ---------- ----------
Net cash outflow from
operating activities (1,175) (831) (1,338)
---------- ---------- ----------
Cash flows from investing
activities:
Purchase of investments (5,503) (7,547) (16,414)
Sale/repayment of
investments 4,853 14,386 27,840
---------- ---------- ----------
Net cash inflow/(outflow)
from investing
activities (650) 6,839 11,426
---------- ---------- ----------
Cash flows from financing
activities:
Issue of ordinary shares 17,042 1,430 1,984
Share issue expenses (16) (8) (60)
Purchase of ordinary
shares for cancellation (908) (793) (1,388)
Equity dividends paid (3,008) (8,855) (12,105)
---------- ---------- ----------
Net cash (outflow)/inflow
from financing
activities 13,110 (8,226) (11,569)
---------- ---------- ----------
Net (decrease)/increase
in cash and cash
equivalents 11,285 (2,218) (1,481)
Cash and cash equivalents
at beginning of period 27,086 28,567 28,567
---------- ---------- ----------
Cash and cash equivalents
at end of period 38,371 26,349 27,086
---------- ---------- ----------
RISK MANAGEMENT
The board carries out a regular and robust assessment of the
risk environment in which the company operates and seeks to
identify new risks as they emerge. The principal and emerging risks
and uncertainties identified by the board which might affect the
company's business model and future performance, and the steps
taken with a view to their mitigation, are as follows:
Investment and liquidity risk: investment in smaller and
unquoted companies, such as those in which the company invests,
involves a higher degree of risk than investment in larger listed
companies because they generally have limited product lines,
markets and financial resources and may be more dependent on key
individuals. The securities of smaller companies in which the
company invests are typically unlisted, making them illiquid, and
this may cause difficulties in valuing and disposing of the
securities. The company may invest in businesses whose shares are
quoted on AIM -- the fact that a share is quoted on AIM does not
mean that it can be readily traded and the spread between the
buying and selling prices of such shares may be wide. Mitigation:
the directors aim to limit the risk attaching to the portfolio as a
whole by careful selection, close monitoring and timely realisation
of investments, by carrying out rigorous due diligence procedures
and maintaining a wide spread of holdings in terms of financing
stage and industry sector within the rules of the VCT scheme. The
board reviews the investment portfolio with the investment manager
on a regular basis.
Financial risk: most of the company's investments involve a
medium to long-term commitment and many are illiquid. Mitigation:
the directors consider that it is inappropriate to finance the
company's activities through borrowing except on an occasional
short-term basis. Accordingly they seek to maintain a proportion of
the company's assets in cash or cash equivalents in order to be in
a position to pursue new unquoted investment opportunities and to
make follow-on investments in existing portfolio companies. The
company has very little direct exposure to foreign currency risk
and does not enter into derivative transactions.
Economic risk: events such as economic recession or general
fluctuation in stock markets, exchange rates and interest rates may
affect the valuation of investee companies and their ability to
access adequate financial resources, as well as affecting the
company's own share price and discount to net asset value. The
level of economic risk has been elevated most recently by
inflationary pressures, interest rate increases, and supply
shortages. Mitigation: the company invests in a diversified
portfolio of investments spanning various industry sectors, and
maintains sufficient cash reserves to be able to provide additional
funding to investee companies where it is appropriate and in the
interests of the company to do so. The manager typically provides
an investment executive to actively support the board of each
unquoted investee company. At all times, and particularly during
periods of heightened economic uncertainty, the investment
executives share best practice from across the portfolio with
investee management teams in order to mitigate economic risk.
Stock market risk: some of the company's investments are quoted
on the London Stock Exchange or AIM and will be subject to market
fluctuations upwards and downwards. External factors such as
terrorist activity, political activity or global health crises, can
negatively impact stock markets worldwide. In times of adverse
sentiment there may be very little, if any, market demand for
shares in smaller companies quoted on AIM. Mitigation: the
company's quoted investments are actively managed by specialist
managers, including Mercia in the case of the AIM-quoted
investments, and the board keeps the portfolio and the actions
taken under ongoing review.
Credit risk: the company holds a number of financial instruments
and cash deposits and is dependent on the counterparties
discharging their commitment. Mitigation: the directors review the
creditworthiness of the counterparties to these instruments and
cash deposits and seek to ensure there is no undue concentration of
credit risk with any one party.
Legislative and regulatory risk: in order to maintain its
approval as a VCT, the company is required to comply with current
VCT legislation in the UK. Changes to UK legislation in the future
could have an adverse effect on the company's ability to achieve
satisfactory investment returns whilst retaining its VCT approval.
Mitigation: the board and the investment manager monitor political
developments and where appropriate seek to make representations
either directly or through relevant trade bodies.
Internal control risk: the company's assets could be at risk in
the absence of an appropriate internal control regime which is able
to operate effectively even during times of disruption. Mitigation:
the board regularly reviews the system of internal controls, both
financial and non-financial, operated by the company and the
investment manager. These include controls designed to ensure that
the company's assets are safeguarded and that proper accounting
records are maintained.
VCT qualifying status risk: while it is the intention of the
directors that the company will be managed so as to continue to
qualify as a VCT, there can be no guarantee that this status will
be maintained. A failure to continue meeting the qualifying
requirements could result in the loss of VCT tax relief, the
company losing its exemption from corporation tax on capital gains,
to shareholders being liable to pay income tax on dividends
received from the company and, in certain circumstances, to
shareholders being required to repay the initial income tax relief
on their investment. Mitigation: the investment manager keeps the
company's VCT qualifying status under continual review and its
reports are reviewed by the board on a quarterly basis. The board
has also retained Philip Hare & Associates LLP to undertake an
independent VCT status monitoring role.
OTHER MATTERS
The unaudited interim financial statements for the six months
ended 30 September 2022 do not constitute statutory financial
statements within the meaning of Section 434 of the Companies Act
2006, have not been reviewed or audited by the company's
independent auditor and have not been delivered to the Registrar of
Companies. The comparative figures for the year ended 31 March 2022
have been extracted from the audited financial statements for that
year, which have been delivered to the Registrar of Companies; the
independent auditor's report on those financial statements (i) was
unqualified, (ii) did not include any reference to matters to which
the auditor drew attention by way of emphasis without qualifying
the report and (iii) did not contain a statement under Section 498
(2) or (3) of the Companies Act 2006. The interim financial
statements have been prepared on the basis of the accounting
policies set out in the annual financial statements for the year
ended 31 March 2022.
Each of the directors confirms that to the best of their
knowledge the interim financial statements have been prepared in
accordance with the Statement "Half-yearly financial reports"
issued by the UK Accounting Standards Board and the interim
financial report includes a fair review of the information required
by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements, and a description of the
principal risks and uncertainties for the remaining six months of
the year, and (b) DTR 4.2.8R of the Disclosure Rules and
Transparency Rules, being related party transactions that have
taken place in the first six months of the current financial year
and that have materially affected the financial position or
performance of the entity during that period, and any changes in
the related party transactions described in the last annual report
that could do so.
The directors of the company at the date of this statement were
Mr D P A Gravells (Chair), Mr S P Devonshire, Miss C A McAnulty, Mr
F L G Neale and Ms R K Ramparia.
The calculation of return per share is based on the return after
tax for the six months ended 30 September 2022 and on 187,721,836
(2021: 161,752,727) ordinary shares, being the weighted average
number of shares in issue during the period.
The calculation of net asset value per share is based on the net
assets at 30 September 2022 divided by the 187,760,850 (2021:
162,993,971) ordinary shares in issue at that date.
The interim dividend of 2.0 pence per share for the year ending
31 March 2023 will be paid on 13 January 2023 to shareholders on
the register at the close of business on 9 December 2023.
A copy of the interim financial report for the six months ended
30 September 2022 will be available on the Mercia Asset Management
PLC website.
The contents of the Mercia Asset Management PLC website and the
contents of any website accessible from hyperlinks on the Mercia
Asset Management PLC website (or any other website) are not
incorporated into, nor form part of, this announcement.
(END) Dow Jones Newswires
November 23, 2022 09:30 ET (14:30 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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