Unaudited Half-Yearly Financial Report for the Six Months Ended 30 September 2024
21/11/2024 14:00
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21 NOVEMBER 2024
NORTHERN 2 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2024
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by Mercia Fund
Management Limited (the Manager). 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 2023 and 31 March
2024)
Six months ended 30 September 2024 Six months ended 30 September 2023 Year ended 31 March 2024
Net assets £127.5m £113.9m £119.5m
Net asset value per share 57.2p 58.6p 57.3p
Return per share
Revenue 0.2p 0.3p 0.8p
Capital 0.8p 0.6p 0.6p
Total 1.0p 0.9p 1.4p
Dividend per share declared in respect of the period 1.7p 1.8p 3.0p
Cumulative return to shareholders since launch
Net asset value per share 57.2p 58.6p 57.3p
Dividends paid per share* 140.3p 137.3p 139.1p
Net asset value plus dividends paid per share 197.5p 195.9p 196.4p
Mid-market share price at end of period 55.0p 55.0p 54.5p
Share price discount to net asset value 3.8% 6.1% 4.9%
Tax-free dividend yield (based on the net asset value per share)** 5.0% 5.5% 5.1%
* Excluding interim dividend not yet paid.
** The dividend yield is calculated by dividing the dividends
declared in the 12 month period ended on each reference date by the net asset
value per share at the start of that period.
Enquiries:
James Sly / Sarah Williams, Mercia Asset Management PLC – 0330 223 1430
Website: www.mercia.co.uk/vcts
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2024
There have been a significant number of developments in the last reporting
period which are likely to have a long-term impact on your Company. The global
political and economic climate remains volatile, as a result of conflict in
both Europe and the Middle East and a degree of uncertainty following the US
presidential election. The UK general election delivered a large parliamentary
majority for the Labour party which commentators suggest may create a period
of political stability. It is probably too early to be entirely clear about
the longer term impact of the Chancellor of the Exchequer’s recent budget,
the objective of which was to set a path of economic growth, which of course
aligns closely with your Company’s core objectives in respect of its
investments. Perhaps most importantly the European Commission confirmed that
the VCT investment schemes, which are so critical to financing early stage
businesses, would be extended until April 2035. There has been some easing of
inflationary pressures and a stabilisation in energy prices. Interest rates
have fallen from the peak, but it is still uncertain as to how quickly that
will continue. Your Company continues to deliver vital investments into early
stage businesses providing ongoing support to its existing portfolio companies
and generating returns from successful realisations.
Results and dividend
The Company achieved a return of 1.0 pence per share in the period (2023: 0.9p
per share), equivalent to 1.9% of the audited net asset value (NAV) per share
on 31 March 2024. After deducting the final dividend for the year to 31 March
2024 of 1.2p, paid in August 2024, the NAV per share at 30 September 2024 was
57.2 pence.
It remains our objective to pay a dividend at least equivalent to 5% of the
opening NAV in each year. The Board has declared an interim dividend for the
year ending 31 March 2025 of 1.7 pence per share, which will be paid on 22
January 2025 to shareholders who are on the register on 20 December 2024.
Venture capital investment activity and portfolio update
We are pleased to report that a number of our venture investments have
performed well over the period, reflected in an overall increase in the
valuation of the unquoted portfolio. Where portfolio companies have struggled
or are at risk of failure, we have also made a number of reductions in
valuations to reflect our current assessment.
The unaudited total (realised and unrealised) gain on investments for the six
month period to 30 September 2024 was £2.4 million (six months ended 30
September 2023: £2.1 million) of which £0.9 million related to net
unrealised gains in the portfolio driven by commercial traction in several
portfolio companies. As is to be expected in a portfolio of more than 50
companies, these increases have been partially offset by some value reductions
where particular portfolio companies have struggled or are at risk of failure.
Overall, total returns from the portfolio have shown resilience against a
challenging economic backdrop.
During the reporting period we have continued to achieve realisations of our
portfolio with £6.0 million of realisations. Notably, the Company’s
investment in Gentronix, a biotechnology company that provides predictive
toxicology solutions, was divested for net proceeds of £5.2 million,
representing 4.5 times return on the original cost. The majority of this
substantial gain on sale had already been reflected in prior accounting
periods with £1.3 million of the gain recognised upon exit. Gentronix was one
of the Company’s oldest investments, where the initial investment in 2007
was followed by two additional funding rounds.
Investment activity continued in the period, with £5.9 million invested
across three existing and three new portfolio companies. The new portfolio
companies are Ski Zoom (t/a Heidi) (£1.5 million investment), a booking
platform for flexible winter mountain breaks, Culture AI (£1.4 million), a
cyber security training and monitoring platform, and Promethean Particles
(£1.3 million), a developer of carbon capture and gas storage technologies.
Follow-on capital of £1.7 million was also deployed to support the
Company’s existing portfolio companies.
Following the period end, we exited one of our larger investments, The
Climbing Hangar, at a modest increase on its valuation at 31 March 2024 but
below cost, at just over 70% of our total investment cost. Based in Liverpool,
we first invested in the company, which operated three indoor climbing
centres, in August 2018 and supported the acquisition of five new sites
through three additional funding rounds. However, Covid lockdowns severely
impacted operations and delayed the company's ability to reach breakeven,
creating a need for more capital investment. The company reached its limit for
VCT funding and we were unable to offer further financial support. Whilst a
disappointing financial result, the sale enables the company's operations to
continue with new owners which are able to fund the company's continued
expansion.
Shareholder issues
In April 2024 shares related to the second allotment of the 2023/24 share
offer, totalling £20 million, were issued. This allotment saw the issuance of
17,376,231 new ordinary shares, yielding gross subscriptions of £10.4
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 period.
We continue to experience a sustained demand for long-term growth capital for
smaller companies in the UK. In order to continue to support our existing
portfolio and invest in new early-stage opportunities, in September 2024 we
announced our intention to fundraise in this current tax year 2024/25. This
fundraise will be in conjunction with the other Northern VCTs and it is
envisaged that the Company will seek to raise up to £15 million, with a total
fund raising of up to £36 million across all Northern VCTs. Full details of
how to participate in the fundraise will be published in January 2025.
We have maintained our policy of being willing to buy back the Company’s
shares in the market when necessary in order to provide liquidity to our
shareholders, at a 5% discount to NAV. During the period, a total of 3,538,346
shares were repurchased for cancellation, equivalent to approximately 1.7% of
the opening share capital. As at 30 September 2024, the share price discount
to NAV per share was 3.8%.
VCT qualifying status and legislation
The Company has continued to meet the stringent and complex qualifying
conditions laid down by HM Revenue & Customs for maintaining its approval as a
VCT. The 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.
As noted above, we are pleased to report that following final review by the
European Union and the issuance of the necessary statutory instrument, in
September 2024 the Sunset Clause was extended until 2035. The ‘Sunset
Clause’ is a European state aid requirement which, without extension, would
have removed the VCT tax reliefs that investors receive on newly issued VCT
shares.
Board of Directors
In accordance with the details outlined in our Annual Report, we were pleased
to appoint Thomas Chambers to the Board in June 2024.
Outlook
We remain confident in the prospects of our portfolio companies and will
continue to make the most of the opportunities for value creation as they
arise.
The Board very much appreciates the continuing support of shareholders.
On behalf of the Board
David Gravells
Chair
Investment portfolio
As at 30 September 2024 (unaudited)
Cost £000 Valuation £000 % of net assets by value
Fifteen largest venture capital investments
Pure Pet Food 1,504 3,807 3.0%
Project Glow Topco (t/a Currentbody.com) 1,544 3,530 2.8%
Rockar 1,766 3,244 2.5%
Pimberly 1,876 3,188 2.5%
Tutora (t/a Tutorful) 3,023 3,023 2.4%
Newcells Biotech 2,741 2,741 2.1%
Grip-UK (t/a The Climbing Hangar) 3,536 2,568 2.0%
Netacea 2,486 2,486 1.9%
Ridge Pharma 1,387 2,396 1.9%
Biological Preparations Group 2,166 2,028 1.6%
Broker Insights 1,961 2,001 1.6%
Volumatic Holdings 216 1,869 1.5%
Administrate 2,629 1,855 1.5%
LMC Software 1,842 1,842 1.4%
Forensic Analytics 1,836 1,836 1.4%
Fifteen largest venture capital investments 30,513 38,414 30.1%
Other venture capital investments 49,824 39,642 31.1%
Total venture capital investments 80,337 78,056 61.2%
Net current assets 49,489 38.8%
Net assets 127,545 100.0%
Extracts from the unaudited half-yearly financial statements for the six
months ended 30 September 2024 are set out below.
Income statement
For the six months ended 30 September 2024 (unaudited)
Six months ended 30 September 2024 Six months ended 30 September 2023 Year ended 31 March 2024
Revenue £000 Capital £000 Total £000 Revenue £000 Capital £000 Total £000 Revenue £000 Capital £000 Total £000
Gain on disposal of investments – 1,469 1,469 – 518 518 – 933 933
Movements in fair value of investments – 884 884 – 1,533 1,533 – 1,839 1,839
– 2,353 2,353 – 2,051 2,051 – 2,772 2,772
Dividend and interest income 1,349 – 1,349 1,123 – 1,123 2,738 – 2,738
Investment management fee (277) (832) (1,109) (258) (775) (1,033) (515) (1,545) (2,060)
Other expenses (332) – (332) (322) – (322) (602) – (602)
Return before tax 740 1,521 2,261 543 1,276 1,819 1,621 1,227 2,848
Tax on return (187) 187 – 81 (81) – 73 (73) –
Return after tax 553 1,708 2,261 624 1,195 1,819 1,694 1,154 2,848
Return per share 0.2p 0.8p 1.0p 0.3p 0.6p 0.9p 0.8p 0.6p 1.4p
Balance sheet
As at 30 September 2024 (unaudited)
30 September 2024 £000 30 September 2023 £000 31 March 2024 £000
Fixed assets
Investments 78,056 66,265 75,779
Current assets
Debtors 640 396 911
Cash and cash equivalents 49,023 47,367 42,999
49,663 47,763 43,910
Creditors (amounts falling due within one year) (174) (141) (163)
Net current assets 49,489 47,622 43,747
Net assets 127,545 113,887 119,526
Capital and reserves
Called-up equity share capital 11,159 9,722 10,434
Share premium 62,193 43,847 52,737
Capital redemption reserve 1,256 957 1,079
Capital reserve 54,405 64,843 54,973
Revaluation reserve (2,281) (6,195) (853)
Revenue reserve 813 713 1,156
Total equity shareholders’ funds 127,545 113,887 119,526
Net asset value per share 57.2p 58.6p 57.3p
Statement of changes in equity
For the six months ended 30 September 2024 (unaudited)
Non-distributable reserves Distributable reserves Total £000
Called-up share capital £000 Share premium £000 Capital redemption reserve £000 Revaluation reserve* £000 Capital reserve £000 Revenue reserve £000
At 1 April 2024 10,434 52,737 1,079 (853) 54,973 1,156 119,526
Return after tax – – – (1,428) 3,136 553 2,261
Dividends paid – – – – (1,791) (896) (2,687)
Net proceeds of share issues 902 9,456 – – – – 10,358
Shares purchased for cancellation (177) – 177 – (1,913) – (1,913)
At 30 September 2024 11,159 62,193 1,256 (2,281) 54,405 813 127,545
Six months ended 30 September 2023
At 1 April 2023 9,282 38,165 849 2,015 59,176 89 109,576
Return after tax – – – (8,210) 9,405 624 1,819
Dividends paid – – – – (2,531) – (2,531)
Net proceeds of share issues 548 5,682 – – – – 6,230
Shares purchased for cancellation (108) – 108 – (1,207) – (1,207)
At 30 September 2023 9,722 43,847 957 (6,195) 64,843 713 113,887
Year ended 31 March 2024
At 1 April 2023 9,282 38,165 849 2,015 59,176 89 109,576
Return after tax – – – (2,868) 4,022 1,694 2,848
Dividends paid – – – – (5,664) (627) (6,291)
Net proceeds of share issues 1,382 14,572 – – – – 15,954
Shares purchased for cancellation (230) – 230 – (2,561) – (2,561)
At 31 March 2024 10,434 52,737 1,079 (853) 54,973 1,156 119,526
.
Statement of cash flows
For the six months ended 30 September 2024 (unaudited)
Six months ended 30 September 2024 £000 Six months ended 30 September 2023 £000 Year ended 31 March 2024 £000
Cash flows from operating activities
Return before tax 2,261 1,819 2,848
Adjustments for:
Gain on disposal of investments (1,469) (518) (933)
Gain in fair value of investments (884) (1,533) (1,839)
(Increase)/decrease in debtors 271 (278) (85)
Increase/(decrease) in creditors 11 (33) (11)
Net cash inflow/(outflow) from operating activities 190 (543) (20)
Cash flows from investing activities
Purchase of investments (5,940) (5,715) (15,569)
Sale and repayment of investments 6,016 21,815 22,168
Net cash inflow/(outflow) from investing activities 76 16,100 6,599
Cash flows from financing activities
Issue of ordinary shares 10,802 6,389 16,507
Share issue expenses (444) (159) (553)
Purchase of ordinary shares for cancellation (1,913) (1,207) (2,561)
Equity dividends paid (2,687) (2,531) (6,291)
Net cash inflow/(outflow) from financing activities 5,758 2,492 7,102
Net increase in cash and cash equivalents 6,024 18,049 13,681
Cash and cash equivalents at beginning of period 42,999 29,318 29,318
Cash and cash equivalents at end of period 49,023 47,367 42,999
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:
Credit risk: the Company holds a number of financial instruments and cash
deposits and is dependent on the counterparties discharging their commitment.
Such balances may be held with banks or in money market funds as part of the
Company’s liquidity management.
Mitigation: the Directors review the creditworthiness of the counterparties to
these instruments including the rating of money market funds to seek to manage
and mitigate exposure to credit risk.
Economic and geopolitical 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 is assessed against
macroeconomic factors such as inflation, interest rates and the ability of
companies to raise funds in the capital and private markets.
Mitigation: the Company invests in a diversified portfolio of investments
spanning various industry sectors and which are at different stages of growth.
The Company 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’s team is structured such
that appropriate monitoring and oversight is undertaken by an experienced
investment executive. As part of this oversight, the investment executive will
guide and support the board of each unquoted investee company. At all times,
and particularly during periods of heightened economic uncertainty, the
investment team of the Manager share best practice from across the portfolio
with the management teams in order to help with addressing economic
challenges.
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.
Investment and liquidity risk: the Company invests in early stage companies
which may be pre-revenue at the point of investment. Portfolio companies may
also require significant funds, through multiple funding rounds to develop
their technology or the products being developed may be subject to regulatory
approvals before they can be launched into the market. This involves a higher
degree of risk and company failure compared to investment in larger companies
with established business models. Early stage companies generally have limited
product lines, markets and financial resources and may be more dependent on
key individuals. The securities of companies in which the Company invests are
typically unlisted, making them particularly illiquid and may represent
minority stakes, which may cause difficulties in valuing and disposing of the
securities. The Company may invest in businesses whose shares are quoted on
AIM however this may not mean that they 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 investment and liquidity risk
through regular monitoring of the investment portfolio and oversight of the
Manager who is responsible for managing the funds in accordance with the
Company’s investment objective. The investment and liquidity risks are
mitigated through the 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 and liquidity with the Manager on a regular basis.
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 Manager monitor political developments and where
appropriate seek to make representations either directly or through relevant
trade bodies.
Operational risk: the Company does not have any employees and the Board relies
on a number of third party providers, including the Manager, registrar. listed
investments custodian, sponsor, receiving agent, lawyers and tax advisers, to
provide it with the necessary services to operate. Such operations delegated
to the Company’s key service providers may not be performed in a timely or
accurate manner, resulting in reputational, regulatory, or financial damage.
The risk of cyber-attack or failure of the systems and controls at any of the
Company’s third party providers may lead to an inability to service
shareholder needs adequately, to provide accurate reporting and accounting and
to ensure adherence to all VCT legislation rules.
Mitigation: the Board has appointed an Audit and Risk Committee, who monitor
the effectiveness of the system of internal controls, both financial and
non-financial, operated by the Company and the Manager. These controls are
designed to ensure that the Company’s assets are safeguarded and that proper
accounting records are maintained. Third party suppliers are required to have
in place their own risk and controls framework, business continuity plans and
the necessary expertise and resources to ensure that a high quality service
can be maintained even under stressed scenarios.
Stock market risk: a small proportion of the Company’s investments are
quoted on 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 small number of holdings of quoted investments are
actively managed by the Manager, and the Board keeps the portfolio and the
actions taken under ongoing review.
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 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.
The Board continually assesses and monitors emerging risks that could impact
the Company's operations and strategic objectives. As part of the risk
assessment process, the Board evaluates a wide range of potential threats and
uncertainties that may arise from evolving market dynamics, regulatory
changes, technological advancements such as artificial intelligence,
geopolitical developments, and other external factors. By remaining aware of
emerging risks, the Board ensures that the Company is better equipped to
anticipate challenges and adapt swiftly to changing circumstances.
Other Matters
The unaudited half-yearly financial statements for the six months ended 30
September 2024 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 2024 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
half-yearly 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 2024.
Each of the Directors confirm that to the best of their knowledge the
half-yearly financial statements have been prepared in accordance with the
Statement “Half-yearly financial reports” issued by the UK Accounting
Standards Board and the half-yearly 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 T W Chambers, Mr S P Devonshire, Miss C A McAnulty 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 2024 and on 224,542,017 (30 September 2023:
195,318,553) 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 2024 divided by the 223,175,719 (30 September 2023: 194,443,120)
ordinary shares in issue at that date.
The interim dividend of 1.7 pence per share for the year ending 31 March 2025
will be paid on 22 January 2025 to shareholders on the register on 20 December
2024.
Copies of this half-yearly report will be available to the public at the
Company’s registered office, and on the Company’s website at
www.mercia.co.uk/vcts/n2vct/.
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