Northern 3 Vct Regulatory News (NTN)

24 Nov 2021 16:25

24 NOVEMBER 2021

NORTHERN 3 VCT PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021

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

Financial highlights (comparative figures as at 30 September 2020 and 31 March 2021)

*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.

For further information, please contact:

Enquiries:

Simon John/James Bryce, NVM Private Equity – 0191 244 6000

James Sly/Graham Venables, Mercia Asset Management PLC – 0330 223 1430

HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS

For the six months ended 30 September 2021

Results and dividend

The unaudited net asset value (NAV) per share at 30 September 2021 was 106.1 pence (31 March 2021 (audited) 107.0 pence). The September figure is stated after deducting the second interim (special) dividend of 4.5 pence per share and final dividend of 2.5 pence per share in respect of the year ended 31 March 2021, which were paid on 27 August 2021 and therefore recognised in the current half-yearly accounts.

The total return per share for the half year as shown in the income statement, before deducting the dividends, was 6.1 pence, compared with a return of 18.5 pence in the six month period ended 30 September 2020. The return for the period was mainly produced both by successful realisations combined with an increase in the directors’ valuations of unquoted investments, reflecting continued progress in the performance of some portfolio companies.

The directors have declared an unchanged interim dividend of 2.0 pence per share for the year ending 31 March 2022, which will be paid on 28 January 2022 to shareholders on the register at the close of business on 7 January 2022.

Venture capital investment activity

The prior year which was dominated by supporting existing investments through the impacts of COVID-19, whereas the current period has seen a return to more normal levels of new investment activity. Further progress was made on the development of the portfolio with three new investments completed for an aggregate consideration of £2.8m:

A significant proportion of our investment activity continues to provide additional capital to our existing portfolio companies. A total of £3.7m was invested in eight existing portfolio businesses during the period to support their continued development.

It was a busy period for realisations, with a number of notable transactions either completed or in progress as at the balance sheet date. The highlights during the period were the partial realisation of the investment in Entertainment Magpie Group, which was admitted to AIM under its new name musicMagpie plc in April 2021, and the partial realisation of the investment in Oddbox in August 2021. Both transactions registered excellent returns in excess of 10x the original investment and we have retained stakes in both business as they seek to expand further.

Investment portfolio

Our manager has continued to work closely with investee companies to provide strategic and practical support throughout the pandemic, and we have received frequent progress reports. As previously noted, most of the companies in our portfolio have been able to adapt to the events of the last 18 months and there are very few which continue to be impacted severely. Northern 3 VCT benefits from holding a diversified portfolio of investments, both in terms of sector exposure and stage of business maturity. The portfolio of more mature MBO style investments has continued to provide a series of successful sales as intended and now represents 40% of the total venture capital portfolio by value. We have also started to see the first successful sales from the earlier stage portfolio as it continues to grow and mature.

Share offers and liquidity

Whilst there were significant cash inflows due to the realisations described above, total cash decreased by £2m during the period due to the investment activity and dividends paid. In conjunction with Mercia we have considered the progress achieved by the portfolio to date and the likely further capital required both to enable our investee companies to develop and to fund our pipeline of new opportunities. Consequently, we intend to launch a share offer in January 2022 to be concluded during the 2021-22 tax year. Further details will be announced in due course.

Share buy-backs

We have maintained our policy of buying back our shares in the market, where necessary to maintain market liquidity, at a discount of 5% to NAV. During the period 734,657 shares, were purchased for cancellation at a total cost of £738,196.

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. Mercia monitors the position closely and reports regularly to the board. No further amendments to the VCT legislation were announced by the Chancellor in his 2021 Autumn Budget statement.

Prospects

Whilst the pandemic continues to affect the economic environment, we are encouraged by the number of investment opportunities that our manager has identified and by the continued progress of the portfolio as a whole. We remain committed to supporting the development of entrepreneurial early stage businesses in the UK and believe that your company remains well placed to do so.

On behalf of the Board

James Ferguson

Chairman

The unaudited half-yearly financial statements for the six months ended 30 September 2021 are set out below.

INCOME STATEMENT

(unaudited) for the six months ended 30 September 2021

BALANCE SHEET

(unaudited) as at 30 September 2021

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2021

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2020

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2021

\* 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 2021

INVESTMENT PORTFOLIO SUMMARY

as at 30 September 2021

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 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 by the COVID-19 pandemic which caused a global recession during 2020. 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.

Brexit risk: the UK withdrew from the European Union (EU) on 31 January 2020. The impact on the future business environment in the UK is difficult to predict. Mitigation: whilst we do not expect that Brexit will have a significant impact on the operations of Northern 3 VCT itself, the board and the manager follow Brexit developments closely with a view to identifying changes which might affect the company’s investment portfolio. The manager works closely with investee companies in order to plan for a range of possible outcomes.

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 or global health crises, such as the COVID-19 pandemic, can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the company’s quoted investments are actively managed by specialist managers, including Mercia in the case of the AIM-quoted investments, and the board keeps the portfolio and the actions taken under ongoing review.

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

Legislative and regulatory risk: in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK. Changes to the UK legislation in the future could have an adverse effect on the company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval. Mitigation: the board and the 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, such as that caused by COVID-19. Mitigation: the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the 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 half-yearly financial statements for the six months ended 30 September 2021 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 2021 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The 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 2021.

Each of the directors confirms that to the best of his 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 J G D Ferguson (Chairman), Mrs A B Brown, Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

The calculation of return per share is based on the return after tax for the six months ended 30 September 2021 and on 109,782,428 (2020: 110,279,045) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share is based on the net assets at 30 September 2021 divided by the 110,084,493 (2020: 110,445,090) ordinary shares in issue at that date.

The interim dividend of 2.0 pence per share for the year ending 31 March 2022 will be paid on 28 January 2022 to shareholders on the register at the close of business on 7 January 2022.

A copy of the half-yearly financial report for the six months ended 30 September 2021 will be available on the Mercia Asset Management PLC website.

Neither the contents of the NVM Private Equity LLP or the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP or Mercia Asset Management PLC website (or any other website) is incorporated into, or forms part of, this announcement.