Hygea VCT plc : Final Results

For immediate release                                                                                                               6 February 2018

Hygea vct plc

Annual Report and Financial Statements
For the year ended 31 December 2017

and

Notice of Annual General Meeting

The Directors are pleased to announce the audited results of the Company for the year ended 31 December 2017. A copy of the Annual Report and Financial Statements will be made available to shareholders shortly, and extracts are now set out below.

In addition, the Notice of Annual General Meeting ("AGM") is attached at the end of the Report and Financial Statements.  The AGM will be held at the offices of Howard Kennedy LLP, No 1 London Bridge, London SE1 9BF on Thursday 5 April 2018 at 11.30.  A copy of both documents will be available from the registered office of the Company at 39 Alma Road, St Albans AL1 3AT, as well as on the Company's website: www.hygeavct.com

Financial Summary

Enquiries:     
John Hustler, Chairman on 01428 727985 
Roland Cornish, Beaumont Cornish Limited on 020 7628 3396

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) 596/2014

Please note:  page references in the extracts below refer to the page numbers in the Annual Report and Financial Statements.

Chairman's Statement

I am pleased to present the 2017 Annual Report to shareholders.

Overview
As shareholders will be aware, in a circular issued by the Company in December 2017 your Board presented proposals for the long term future for the Company through the launch of a new B share class to be managed by Seneca. I would like to thank all those who supported us at the recent General Meeting which allows us to implement our proposals.  As stated in the circular, following the first allotment of B shares our existing shareholders, who have been extremely patient and supportive, especially in recent years, will be able to retain their shares with no further dilution to value (as a result of annual running costs), whilst awaiting liquidity events within the ordinary share portfolio (as the annual running costs of the Company will be assumed by the B share pool for an initial period of 3 years, costs which would have been incurred by new investors if Seneca had launched a new VCT on its own).

We are excited about Seneca's plans for the future and hope you will consider supporting the Offer for Subscription for B shares, the prospectus relating to which is expected to be published early in the new tax year. We had originally expected to be able to raise new funds in the current tax year but, unfortunately, we have not yet received approval from HMRC in respect of the terms of the reduction in the nominal value of the ordinary shares, which forms an important part of our overall proposals.

2017 has generally seen commercial progress across the portfolio, with the one exception being Glide being placed in Administration (as previously announced) which occurred due to the Glide team's inability to raise adequate funding - the technology is now being commercialised by a new company. In terms of emerging value, we see light on the horizon, some of the reasons for which are outlined in greater detail under Investment Review. The Net Asset Value at 31 December 2017 was 63.8p per share compared to 68.3p per share at 31 December 2016 and 64.4p per share at 30 June 2017.

Details of the individual portfolio companies are included below and in the Investment Review.

We expect that the first allotment of B shares will take place as soon as the minimum sum under the offer has been received. Existing shareholders will be offered a loyalty discount as well as the early bird offer which will be available for a limited period. Following the first allotment of B shares, at which time the new arrangements with Seneca will become effective and, as indicated in the recent circular, we have agreed that the name of the Company will change to Seneca Growth Capital VCT Plc. It has also been agreed that a representative of Seneca will join the Board.

Results and Dividend

During the year our revenue return on ordinary activities saw a loss of 1.5p per share, a 6.25% reduction on 2016's loss of 1.6p. This shows that our focus on cost reduction continues. Notwithstanding the reduction in NAV, the total expense ratio remains at 2.3%.

The capital return per share amounted to a loss of 3.0p compared to a loss of 5.6p in 2016, primarily due to the reduction in the bid price of our AIM portfolio but offset by the increase in the value of Arecor following a recent funding round in which we did not partake. Scancell shows a reduction over the year as a whole but a slight increase in the second half of the year. Following Immunobiology's fundraising in the first half of the year, we made a full provision against this investment at 30 June 2017.

During the year we made no investments but have realised our remaining holdings in EKF Diagnostics plc and Genedrive plc in order to provide for working capital.

As previously reported, Hygea has a policy of accruing the Board's performance fee and, due to the reduction in Net Asset Value, this accrual has reduced during the year by £91,000, thus reducing the loss for the year. The accrual was £164,000 at 31 December 2017.

Overall, the total return for the year amounted to a loss of 4.5p per share compared to a loss of 7.2p per share in 2016.

Our overdraft facility has remained at £200,000 throughout the year and has been renewed. The Board continue to utilise most of this but does not consider it prudent to seek to increase the limit, even though interest rates remain low. This will be reviewed in the light of the proposals outlined above but, following the allotment of B shares, the Company will be cash positive.

As I have already reported, the Board's current policy with regard to dividends will be to return funds to shareholders as soon as practical following any significant realisation. We are hopeful that 2018 may see some M&A activity within the portfolio and we expect that the ordinary shares will see a reduced dilution to NAV following our proposed fundraising.

Portfolio Review

I have reported above on the sale of shares in portfolio companies for liquidity management purposes. In addition Axon Limited has been liquidated and, whilst it had been written down to nil value, we have now removed it from our list of holdings. Full details of our portfolio and an update in relation to our major investments is included in the Investment Review.

We have over the years observed that the UK capital market does not function well for loss making deeptech businesses in general and for Life Sciences in particular. However, we are now seeing developments which we believe may provide solutions, namely:

i) we are starting to see more activity across several deeptech sectors whereby larger companies are seeking to collaborate with smaller companies which have developed disruptive technology. Evidence of this within Hygea's portfolio is the collaboration announced in January 2018 between Scancell and BioNTech - the latter was only founded in 2008 but is already regarded as a European powerhouse within immuno-oncology.  This collaboration also illustrates how solutions are likely to involve combining technologies rather than being based on a single technology. Although this relationship is regarded by the Scancell board as potentially transformational for Scancell (taking it into the exciting field of cell therapy), it has yet to have any impact on its share price.

ii) over the last year, a number of new initiatives have been launched (some of which are FinTech based) which should contribute to alleviating the fundraising challenge for deeptech businesses; for example, in April 2017 Newable acquired London Business Angels as a first step in implementing its strategy to build a modern day version of what 3i used to be.

The other company which I would highlight is Arecor. We originally invested in Insense in 2003, which spun out the technology which it had developed for enabling biologics to be stored at room temperature (for benefits, see Investment Review), to Arecor, which has now developed a profitable formulations' business providing services to pharmaceutical companies, and is using this platform to develop its own products.

Annual General Meeting
The Company's AGM will be held at 11.30 a.m. on Thursday 5^th April 2018 at the Offices of Howard Kennedy LLP, 1 London Bridge, London SE1 9BG and we look forward to welcoming you to the meeting.

As shareholders will be aware, the resolutions passed at the recent General Meeting included changes to the Company's Articles and we will now need to make further changes in respect of the rights of the deferred shares to ensure that shareholders who have rolled over gains will not be disadvantaged. In addition, since we will not be allotting new shares before the AGM, we need to have a continuation vote at this AGM following which the provisions which give the Company continued life until five years after the last share allotment will become effective.

VCT Qualifying Status
We have appointed Philip Hare & Associates to provide the Board with advice on the ongoing compliance with HMRC rules and regulations concerning VCTs; they have confirmed that we remain within all the appropriate VCT qualifying regulations.

Fund Administration
Our administration will remain unchanged until the proposals for B shares become effective, at which time Seneca will become responsible for the Company's administration and their Director will be appointed to the Board. However it is envisaged that most of the current arrangements, e.g. accounting, registrars etc., will continue for the foreseeable future and Craig Hunter will continue as the Company Secretary. In addition, Annual Reports, notices of meetings and other documents will continue to be published on our website at www.hygeavct.com. We are grateful to those shareholders who have elected for e-communications and, in the spirit of reducing paper, we would urge other shareholders to elect for this method of communication by contacting the Registrars.

Future Prospects
Your Board has previously indicated that we view the future prospects for the Company with optimism. Current indications are that the unquoted portfolio may see a liquidity event sooner than previously envisaged. Furthermore we believe that the news from Scancell with regard to its partnership with Cancer Research UK, the leading UK cancer charity, as well as its 2017 fund raising in which some major institutions became shareholders, supports our confidence in this investment. We therefore remain optimistic regarding the ordinary share portfolio.

We also have high hopes for the forthcoming fund raising and the future of the B share pool to be managed by Seneca and therefore our view of the future for Hygea remains positive.

John Hustler
Chairman
5 February 2018

Investment Review

Investment Portfolio

Ten largest holdings (by value)

• Hallmarq Veterinary Imaging Limited

Update since 2016: The unaudited results to August 2017 showed sales of £6.2 million (2016: £6.4 million), and EBITDA of £2.0 million (2016: £2.5 million), with recurring income growing from £5.2 million to £6.2 million - the 2015/16 results included an instrument sale, whilst in 2016/17 no such sale was made. The particular focus in 2017 was on planning for the next phase of growth, based on a combination of:

• growing sales of existing products, with a focus on PetVet in particular;
• strengthening the commercial capability for addressing the US market;
• adding new imaging modalities which complement MRI; and
• considering strategic acquisitions.

• Scancell plc

Update since 2016: Key events include:

1. 5-year survival achieved in resected SCIB1 melanoma patients (90% survival including seven patients alive after 5 years). An application for SCIB1 Phase 2 checkpoint inhibitor combination trial in US is to be submitted in early 2018;
    
2. entering into a collaboration with the Addario Lung Cancer Medical Institute (ALCMI) and the Bonnie J. Addario Lung Cancer Foundation on conducting a Phase I/II clinical trial with SCIB2 (lung cancer vaccine) which is planned to begin in 2018 and complete c.18 months later. ALCMI's goal is to transform lung cancer into a chronically managed disease by 2023;
    
3. generating pre-clinical data which suggests that Modi-1 should be effective in up to 90% of patients with triple negative breast cancer, up to 95% of patients with ovarian cancer and up to 100% of patients with sarcoma - the company expects to begin a Modi-1 phase I/II study in Q3 2018 with first efficacy and safety data expected in Q3 2019;
    
4. a Clinical Development Partnership was entered into with Cancer Research UK (CRUK) to develop SCIB2, for the treatment of patients with solid tumours, including non-small cell lung cancer - CRUK will fund and sponsor a UK-based Phase I/II clinical trial of SCIB2 in combination with a checkpoint inhibitor;
    
5. a collaboration being entered into with BioNTech for the Moditope product being developed for the treatment of lung, triple-negative breast cancer, ovarian and endometrial cancers. BioNTech is one of Europe's new immuno-oncology power-houses; and
    
6. a colleague of the Chairman became the new CEO in January 2018. He was VP Business Development at Arana when it acquired Scancell's monoclonal antibody business in 2006.
    

• OR Productivity plc

Update since 2016: Key events include:

• completion of FreeHand V 2.0 in Q4 2017;
   
• the expiration of key Intuitive Surgical patents (relating to the Da Vinci robotic system, currently the leading robotic product in the market) has led to increased investment by multiple companies in robotic tools.  The completion of FreeHand V 2.0 combined with these new tools can create a complete robotic system which will open the benefits of robotic surgery to "mass market procedures";
   
• ORP's clinical study programs have produced the first evidence to prove the significant benefits in terms of reductions in both operating time and also reduced post-operative hospital stay by enabling surgeons to work with a still image rather than a wobbly image. This is important not only in efficiency terms but also in assisting health service providers such as the NHS deal with the staff shortages which they are currently experiencing; in other words, FreeHand is an example of automation which rather than reducing employment enables staff to deploy their skills on more valuable activities, leaving FreeHand to hold the camera in a way which delivers better results for the surgeon, the patient and the health service provider;
   
• hospitals are starting to identify specific procedures where FreeHand not only improves efficiency but also helps deliver better patient outcomes eg out of hours appendectomies, inflamed gall bladders etc. This will assist a 'land and expand' strategy within hospitals; and
   
• increasing evidence is emerging that FreeHand can be used beyond keyhole surgery.  There is early stage interest for using FreeHand in conjunction with other Medical Devices being developed in the field of minimally invasive surgery, including giving radiation therapy for tumours and the manoeuvring of scopes and devices for use in natural orifice surgery. In these two instances, FreeHand provides surgeons with the ability to achieve both precision positioning of the device and also stillness in between movements.

• Omega Diagnostics plc

Update since 2016: The interim results to September 2017 showed sales of £7.1 million (2016: £6.8 million) and adjusted pre-tax profit of £191,000 (2016: £417,000) - overheads increased in order to put in place more of the resources required for growth.

Key events include:

• re the CD4 potentially transformational project (which started in 2012), the achievement of CE marking was announced in November 2017. This is expected to result in modest sales during 2018, whilst additional regulatory approval is sought through the World Health Organisation Prequalification programme. Achievement of the latter is expected to result in significant sales being achieved thereafter;
   
• re the IDS-iSYS potentially transformational project (which started in 2013), CE marking of a menu of 49 allergens has been achieved, with a further 9 due to be added over the next few months. Commercialisation discussions with AIM listed Immunodiagnostic Systems Holdings plc, the owner of the IDS-iSYS platform, are expected to be concluded in the near future;
   
• the malaria assay referred to in last year's Annual Report has been launched and is in the process of being commercialised; and
   
• a digital health strategy is being developed in conjunction with the North American distribution partners for the food intolerance products, to assist both users of the tests and their medical advisers make better informed decisions based on the outcome of the tests. North America is a new market being tackled and once this digital solution is developed, it will be able to be used in other regions.

• Fuel 3D Limited

Update since 2016: Key events include:

• the company raised £8m in early 2017 to continue product development;
   
• in early 2017 a new CEO and COO/CFO were appointed, bringing experience of scaling up technology based businesses. The initial focus has been on developing a technology platform and an organisation capable of delivering scalable business solutions to multiple customers;
   
• the lead product is BioVolume, which was developed in partnership with a world leading pharmaceutical company to develop a better alternative to manual callipers for measuring the size of tumours in animals used in the drug development process. BioVolume improves measurement accuracy, inter-operator consistency, animal welfare, cost efficiencies, compliance and the success of pre-clinical oncology research. The market size is believed to be many tens of millions of pounds; and
   
• developing products for facial recognition applications has been put on hold whilst the scalability project referred to above is implemented. However, some major companies have already been expressing interest.

6. Arecor Limited

Update since 2016:

• the pre-tax loss of £59,375 for the year to May 2017 is after increasing R&D expenditure associated with own product development by £752,000. Key events include:
   
• the first feasibility study has been converted into a license to a major pharmaceutical company, with provision for milestone payments and royalties;
   
• the partnership entered into with the Juvenile Diabetes Research Foundation (which provided $900,000 of funding) to accelerate the development of a stable, rapid-acting,ultra concentrated insulin to the end of non-clinical studies was successfully completed at the end of 2017 - this will be Arecor's first own product. The next step is a first-in-human clinical study in 2018;
   
• the patent portfolio was strengthened by the European Patent Office issuing a "Notice of Intention to Grant" for Arecor's patent application protecting the Company's proprietary technology used in the development of stable, low-viscosity formulations of highly concentrated protein therapeutics, including monoclonal antibodies; and
   
• a significant fundraise is required in order to take products through human clinical trials, with the process advancing .

• Insense Limited

Update since 2016: work has continued on product formulation and stability for the topical fungal nail pharma product, aiming to finalise a product specification for first-in-man trials.

8.  Exosect Limited

Update since 2016: in 2017 testing programmes were started with a number of third parties, several of which are anticipated to be converted into licenses.

• Microarray Limited

Key events in 2017 include:

• completion of technical proof-of-principle laboratory testing for Microarray's 'worry/don't worry' wound diagnostic test; and,
   
• starting of large scale clinical studies to collect wound fluid and diagnostic information to be used in laboratory development of Microarray's diagnostic tests.

• ImmunoBiology Limited

Update since 2016: 2017 was spent preparing the company for a significant fundraise to finance a PnuBioVax Phase II clinical trial, with the objective of a successful outcome leading to a shareholder exit.

Directors' Report

The Directors present their Report and the audited Financial Statements for the year ended 31 December 2017.

The Directors consider that the Annual Report and Financial Statements, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Review of Business Activities
The Directors are required by s417 of the Companies Act 2006 to include a Business Review to shareholders.  This is set out on page 19 and forms part of the Strategic Report. The Chairman's Statement on pages 9 to 11, and the Investment Review on pages 12 to 18 also form part of the Strategic Report.

The purpose of this review is to provide shareholders with a snapshot summary setting out the business objectives of the Company, the Board's strategy to achieve those objectives, the risks faced, the regulatory environment and the key performance indicators used to measure performance.

Directors' Shareholdings
The Directors of the Company during the period and their interests (in respect of which transactions are notifiable under Disclosure and Transparency Rule 3.1.2R) in the issued ordinary shares of 50p are shown in the table below:

All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2017 and the date of this report.

Directors' and Officers' Liability Insurance
The Company has maintained directors' and officers' liability insurance cover on behalf of the Directors and Company Secretary. 

Whistleblowing
The Board has approved a Whistleblowing Policy for the Company, its directors and any employees, consultants and contractors, to allow them to raise concerns, in confidence, in relation to possible improprieties in matters of financial reporting and other matters.

Bribery Act
The Board has approved an Anti-Bribery Policy to ensure full compliance with the Bribery Act 2010 and to ensure that the highest standards of professional and ethical conduct are maintained.

Management
Since 30 July 2007 the Board has assumed responsibility for the management of the Company and its portfolio.  The terms of the Board's remuneration are set out in the Directors' Remuneration Report on pages 32 and 33.

As announced on 15 December 2017, the Board have been considering the future direction of the Company, given the absence of significant realisations and the continuing running costs. We continue to believe that there remains significant potential within the portfolio but, having taken measures to reduce the costs associated with maintaining listed company status without losing valuable shareholder benefits, we remain keen to seek ways to further minimise the costs during the remainder of the holding period for the existing investments. The Board has determined that the best way this can be achieved is to seek to raise additional funds, which can be best achieved by appointing a new third party manager. To that end, we intend to appoint Seneca to manage a new share pool of assets, to be created by the issue of a new class of B shares. Seneca will also take on responsibility for the day to day management of the VCT, although the Board will continue to manage the existing investments (in the ordinary share pool) and will retain broad discretion to monitor the performance of Seneca. It is expected that a prospectus will be issued early in the new tax year, to raise up to £20m via an offer for subscription of B shares.

Share Issues
During the year, the Company did not issue any shares (2016: nil).

Share Capital
The Company's issued ordinary share capital as at 31 December 2017 is 8,115,376 ordinary shares of 50p each (31 December 2016: 8,115,376).

Directors
Biographical details of the Directors are shown on page 22.

In accordance with the Articles, John Hustler and Charles Breese have both been directors for more than nine years and will therefore retire and offer themselves for re-election at the forthcoming AGM.
             
The Board is satisfied that, following individual performance appraisals, the Directors, who are retiring, continue to be effective and to demonstrate commitment to the role and therefore offer themselves for re-election with the support of the Board.

The Board is cognisant of shareholders' preference for Directors not to sit on the boards of too many listed companies ("over-boarding").  As part of their assessment as to his suitability, the Directors considered Richard Roth's other directorships at the time of his appointment, given that he also sits on the boards of the four Oxford Technology ("OT") VCTs.  The Directors noted that those four funds have a common board, and there is an element of overlap in the workload across the four entities, such that the time required is less than would be necessary for four totally separate and listed companies. They also note that Hygea has a number of shared portfolio companies with the OT VCTs. The Board was satisfied that Richard Roth had the time to focus on the requirements of the Company, and this has proven to be the case.

International Financial Reporting Standards
As the Company is not part of a group it is not mandatory for it to comply with International Financial Reporting Standards.  The Company does not anticipate that it will voluntarily adopt International Financial Reporting Standards. The Company has adopted Financial Reporting Standard 102 - The Financial Reporting Standard Applicable in the United Kingdom and Republic of Ireland.

Environmental Policy
The Company always makes a full effort to conduct its business in a manner that is responsible to the environment.

Going Concern
The Company's business activities and the factors likely to affect its future performance and position are set out in the Chairman's Statement and Investment Review on pages 9 to 11 and pages 12 to 18. Further details on the management of financial risk may be found in note 15 to the Financial Statements.

The Board receives regular reports from the Administration Manager and the Directors believe that, as no material uncertainties leading to significant doubt about going concern have been identified, it is appropriate to continue to adopt the going concern basis in preparing the Financial Statements.

The assets of the Company consist mainly of securities, some of which are readily realisable.  As such, the Company has adequate financial resources to continue in operational existence for the foreseeable future.

Substantial Shareholdings
At 31 December 2017, two disclosures of major shareholdings had been made to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).

• James Leek has disclosed a shareholding of 5.44% (441,500 shares).
• David Blundell has disclosed a shareholding of 3.09% (251,000 shares).

 No other changes have been notified to the Company.

Annual General Meeting
The Notice convening the 2018 Annual General Meeting ("AGM") of the Company is set out at the end of the Annual Report  and Financial Statements (and a form of proxy in relation to the meeting is enclosed separately). Part of the business of the AGM will be to consider resolutions in relation to the following matters:

1. Independent Auditor

James Cowper Kreston are engaged as the Company's auditors and they offer themselves for reappointment as auditor. A resolution to re-appoint James Cowper Kreston will be proposed at the forthcoming AGM.

1. Directors' Authority to Allot further Ordinary Shares and to Disapply Pre-emption Rights

Resolution 7 renews the Directors' authority to allot further ordinary shares. This would enable the Directors until the next AGM to allot up to 405,768 ordinary shares (representing approximately 5% of the Company's issued ordinary share capital as at 5 February 2018).

Resolution 11 renews the Directors' authority to allot equity securities for cash pursuant to the authority contained in Resolution 7 without pre-emption rights applying. This Resolution would authorise the Directors to issue up to a maximum of 405,768 ordinary shares (representing approximately 5% of the Company's issued share capital as at 5 February 2018) without pre-emption rights applying.

The Directors have no current intention to utilise the authorities under Resolution 7 and 11.

1. Continuation of the Company as a Venture Capital Trust

Resolution 8 approves the continuation of the Company as a venture capital trust (subject to the continuation vote being repeated at a later Annual General Meeting in accordance with the provisions in the Articles of Association).

1. Amendments to the Dividend Rights of Deferred Shares and the Restructuring of the Ordinary Share Capital of the Company

Further to the proposals set out in the circular to shareholders dated 15 December 2017, the Board recommended that the existing ordinary share capital of the Company be restructured to result in each ordinary share having a nominal value of 1p per share (a lower nominal value which is more in keeping with other VCTs).

To effect this, each existing ordinary share was to be sub-divided into one ordinary share of 1p and one "Restructuring Deferred Share" of 49p.   The Restructuring Deferred Shares were to have restricted dividend rights, were to have no rights to receive notice of, or attend or vote at, general meetings and were (on a winding up) only to have an entitlement to 1p for every 1,000,000 Restructuring Deferred Shares (with no further right to participate in any further surplus assets of the Company).  The Articles of Association also provided that the Restructuring Deferred Shares could be re purchased by the Company at any time for an aggregate price of 1p.

After discussions with HMRC the Board were advised that the dividend rights of the Restructuring Deferred Shares should be altered (so that no dividend should be payable on these shares), and the rights attached to other deferred share (to be issued by the Company on any future conversion of ordinary shares into B shares) should likewise have no rights to a dividend.  In both cases the deferred shares will only be issued on a temporary basis (for the purpose of effecting the Share Restructuring or the conversion), and all will be repurchased by the Company promptly after the Share Restructuring or the conversion has been completed. Therefore, the changes to the dividend rights attached to both types of deferred shares should have no practical importance to shareholders.  These changes are reflected in Resolution 9.

To allow the Share Restructuring to be effected, Resolution 10 will propose that the Articles of Association (as amended by the passing of Resolution 9) are amended further to take into account the change in the nominal value of the ordinary shares as a result of the Share Restructuring. The Share Restructuring will create capital redemption reserves from the repurchase of the Restructuring Deferred Shares, and these reserves can subsequently be cancelled, subject to the sanction of the Court, thereby creating further distributable reserves in the Company to assist in the payment of dividends or to assist in the return of funds to shareholders.

After the passing of the relevant resolutions, it is expected that Share Restructuring will take effect at 6.00 p.m. on 5 April 2018, with the amendment to the listing of the ordinary shares arising from the Share Restructuring to take effect at 8.00 a.m. on 6 April 2018.  Immediately following the Share Restructuring, the number of ordinary shares in the Company held by an ordinary shareholder and the NAV per ordinary share will not change. Shareholders who hold their shares in certificated form should note that their existing share certificates will still be valid after the Share Restructuring, and no new certificates will be issued.

By Order of the Board

Craig Hunter
Company Secretary
5 February 2018

Income Statement

There was no other Comprehensive Income recognised during the year

• The 'Total' column of the income statement and statement of comprehensive income is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
• All revenue and capital items in the above statement derive from continuing operations.
• The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.

The Company has no recognised gains or losses other than the results for the year as set out above.

The accompanying notes are an integral part of the Financial Statements.

Statement of Changes in Equity

Refer to note 13 for movement in shareholders' funds.

The accompanying notes are an integral part of the Financial Statements.

*At fair value through profit and loss

The accompanying notes are an integral part of the Financial Statements.

The statements were approved by the Directors and authorised for issue on 5 February 2018 and are signed on their behalf by:

John Hustler
Chairman
Company No: 04221489

Statement of Cash Flows

                                                                                               
The accompanying notes are an integral part of the Financial Statements.

Notes to the Financial Statements

1.                   Principal Accounting Policies

Basis of preparation
The Financial Statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments, and in accordance with UK Generally Accepted Accounting Practice ("GAAP"), including FRS 102 and with the Companies Act 2006 and the Statement of Recommended Practice (SORP) 'Financial Statements of Investment Trust Companies and Venture Capital Trusts (revised 2014)'.

The principal accounting policies have remained materially unchanged from those set out in the Company's 2016 Annual Report and Financial Statements. A summary of the principal accounting policies is set out below.

The Company held all fixed asset investments at fair value through profit or loss. Accordingly, all interest income, fee income, expenses and gains and losses on investments are attributable to assets held at fair value through profit or loss.

The most important policies affecting the Company's financial position are those related to investment valuation and require the application of subjective and complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. These are discussed in more detail below.

Going Concern
After reviewing the Company's forecasts and expectations, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The Company therefore continues to adopt the going concern basis in preparing its Financial Statements.

Key judgements and estimates
The preparation of the Financial Statements requires the Board to make judgements and estimates regarding the application of policies and affecting the reported amounts of assets, liabilities, income and expenses. Estimates and assumptions mainly relate to the fair valuation of the fixed asset investments particularly unquoted investments. Estimates are based on historical experience and other assumptions that are considered reasonable under the circumstances. The estimates and the assumptions are under continuous review with particular attention paid to the carrying value of the investments.

Investments are regularly reviewed to ensure that the fair values are appropriately stated. Unquoted investments are valued in accordance with current International Private Equity and Venture Capital Valuation (IPEV) guidelines, which can be found on their website at www.privateequityvaluation.com, although this does rely on subjective estimates such as appropriate sector earnings multiples, forecast results of investee companies, asset values of investee companies and liquidity or marketability of the investments held.

Although the Directors believe that the assumptions concerning the business environment and estimate of future cash flows are appropriate, changes in estimates and assumptions could result in changes in the stated values. This could lead to additional changes in fair value in the future.

Functional and presentational currency
The Financial Statements are presented in Sterling (£). The functional currency is also Sterling (£).

Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts.

Fixed asset investments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out below. 

Purchases and sales of investments are recognised in the Financial Statements at the date of the transaction (trade date).

These investments will be managed and their performance evaluated on a fair value basis and information about them is provided internally on that basis to the Board.  Accordingly, as permitted by FRS 102, the investments are measured as being fair value through profit or loss on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy.  The Company's investments are measured at subsequent reporting dates at fair value. 

In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. In the case of AIM quoted investments this is the closing bid price. In the case of unquoted investments, fair value is established by using measures of value such as the price of recent transactions, earnings multiple, discounted cash flows and net assets.  These are consistent with the IPEV guidelines.

Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - holding gains/(losses).   

In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.

Fair value hierarchy
Paragraph 34.22 of FRS 102 regarding financial instruments that are measured in the balance sheet at fair value requires disclosure of fair value measurements dependent on whether the stock is quoted and the level of the accuracy in the ability to determine its fair value. The fair value measurement hierarchy is as follows:

For quoted investments:
Level 1: quoted prices in active markets for an identical asset. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held is the bid price at the Balance Sheet date.

Level 2: where quoted prices are not available (or where a stock is normally quoted on a recognised stock exchange that no quoted price is available), the price of a recent transaction for an identical asset, providing there has been no significant change in economic circumstances or a significant lapse in time since the transaction took place. The Company holds no such investments in the current or prior year.

For investments not quoted in an active market:
Level 3: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data (eg: the price of recent transactions, earnings multiple, discounted cash flows and/or net assets) where it is available and rely as little as possible on entity specific estimates.

There have been no transfers between these classifications in the year (2016: none). The change in fair value for the current and previous year is recognised through the profit and loss account.

Current asset investments
No current asset investments were held at 31 December 2017 or 31 December 2016.  Should current assets be held, gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - gains/(losses) on disposal. 

Income
Investment income includes interest earned on bank balances and from unquoted loan note securities, and dividends.  Fixed returns on debt are recognised on a time apportionment basis so as to reflect the effective yield, provided it is probable that payment will be received in due course.

Expenses
All expenses are accounted for on an accruals basis.  Expenses are charged wholly to revenue with the exception of the performance fee, which has been charged 100% to the capital reserve.

Revenue and capital
The revenue column of the Income Statement includes all income and revenue expenses of the Company.  The capital column includes gains and losses on disposal and holding gains and losses on investments.  Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the appropriate capital reserve on the basis of whether they are realised or unrealised at the balance sheet date.

Taxation
Current tax is recognised for the amount of income tax payable in respect of the taxable profit for the current or past reporting periods using the current tax rate. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue return on the "marginal" basis as recommended in the SORP.

Deferred tax is recognised on an undiscounted basis in respect of all timing differences that have originated but not reversed at the balance sheet date, except as otherwise indicated.

Deferred tax assets are only recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.  

Financial instruments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out above.  Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument.

Capital management is monitored and controlled using the internal control procedures set out on page 28 of this report.  The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

The Company does not have any externally imposed capital requirements.

Reserves
Called up equity share capital - represents the nominal value of shares that have been issued.

Share premium account - includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium.

Special distributable reserve - includes cancelled share premium available for distribution.
Capital reserve - holding gains and losses - when the Company revalues the investments still held during the period with any gains or losses arising being credited/ charged to the Capital reserve - holding gains and losses.

Capital reserve - gains and losses on disposal - when an investment is sold any balance held on the Capital reserve - holding gains and losses is transferred to the Capital reserve - gains and losses on disposal, as a movement in reserves.

Revenue reserve - represents the aggregate value of accumulated realised profits, less losses and dividends.

Dividends Payable
Dividends payable are recognised as distributions in the Financial Statements when the Company's liability to make payment has been established.  This liability is established for interim dividends when they are declared by the Board, and for final dividends when they are approved by the shareholders.

2. Income

3. Other Expenses

For the year ended 31 December 2017 the running costs were 2.3% (2016: 2.3%) of net assets.

4. Directors' Remuneration

None of the Directors received any other remuneration from the Company during the year. The Directors may become entitled to receive a share of the Performance Incentive Fee as detailed in the Directors' Remuneration Report on page 32 and in note 5. The Company has no employees other than non-executive Directors.  The average number of non-executive Directors in the year was three (2016: three).

5. Performance fees

The Commercial Advisory Committee took over management of the Company's investments on 30 July 2007, and at that time, a revised Performance Incentive Scheme was implemented, such that its members would be entitled to 20% of all cash returns above the initial net cost to subscribing shareholders of 80p.

On 7 October 2015, this scheme was varied such that any returns above the 31 December 2014 levels would be subject to a hurdle, and the share to the CAC reduced from 20% to 10%. The hurdle is a compound 6% per annum on any amounts below the latest hurdle still due to be paid to shareholders (i.e. in recognition of dividends paid, actual returns to shareholders will be subtracted from the compounding threshold in the year these are paid).

The Total Gross Return at 31 December 2014 on which the performance fee liability of £702,000 was calculated was 123.3p, resulting in the quoted net asset value of 114.6p. For the purposes of this note 5, Total Gross Return is defined as the total return made by the fund, before the deduction of any dividend payments or accruals and/or payments made relating to any potential (or actual) performance incentive fee.

Any dividends paid above 80p will be split 80% to shareholders and 20% to the members of the CAC as at 31 December 2014 (i.e. 25% of all dividends paid to shareholders), until shareholders have received dividends totalling 114.6p.

A performance fee may be payable on any further dividends above this level, but only if the hurdle applicable at that time has been met.

As at 31 December 2017, the Total Gross Return is 90.1p, and so 2.02p per share totalling £164,000 has been accrued (31 December 2016, 95.7p, 3.15p and £255,000).

Assuming no dividends are paid during the year, the Total Gross Return would need to exceed 147p at 31 December 2018 before any fee above £702,000 could be due, and at that time, it would be 10% of any cash payments made above this threshold.  If such a performance fee is not triggered (as it has not been in this financial year) the hurdle, net of dividends paid, increments by a compound annual growth rate of 6%, applied quarterly.

6. Tax on Ordinary Activities

The corporation tax charge for the period was £nil (2016: £nil).
The current rate of tax is the small companies' rate of corporation tax at 19.25% (2016: 20.0%)

The company has excess management expenses of £2,619,000 (2016: £2,592,000) to carry forward to offset against future taxable profits.

Approved VCTs are exempt from tax on capital gains within the Company.  Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a VCT, no current deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.

7. Earnings per Share

             
The earnings per share is based on 8,115,376 (31 December 2016: 8,115,376) shares, being the weighted average number of ordinary shares in issue during the year, and a return for the year totalling (£367,000) (31 December 2016: (£582,000)).

There are no potentially dilutive capital instruments in issue and, therefore, no diluted returns per share figures are relevant. The basic and diluted earnings per share are therefore identical.

8. Net Asset Value per Share 

             
The calculation of NAV per share as at 31 December 2017 is based on 8,115,376 ordinary shares in issue at that date (31 December 2016: 8,115,376).

9. Fixed Asset Investments

Further details of the fixed asset investments held by the Company are shown within the Investment Review on pages 12 to 18.

All investments are initially measured at fair value through profit or loss, and all capital gains or losses on investments are so measured.  The changes in fair value of such investments recognised in these Financial Statements are treated as unrealised holding gains or losses.

10. Debtors

11. Creditors

The amount falling due after more than one year relates to the potential liability for a performance fee. More details are in Note 5.

12. Share Capital

The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective as set on page 6.

During the year, the Company did not issue, nor buy back, any shares.

13. Movement in Shareholders' Funds

The analysis of changes in equity by the various reserves are shown in the Statement of Changes in Equity on page 40. 

When the Company revalues its investments during the period, any gains or losses arising are credited/charged to the Income Statement. Changes in fair value of investments held are then transferred to the capital reserve - holding gains/(losses). When an investment is sold any balance held on the capital reserve - holding gains/(losses) reserve is transferred to the capital reserve - gains/(losses) on disposal as a movement in reserves. 

The purpose of the special distributable reserve was to create a reserve which will be capable of being used by the Company to pay dividends and for the purpose of making repurchases of its own shares in the market with a view to narrowing the discount at which the Company's shares trade to net asset value, providing shareholder authority has been granted.

During 2010, the Company revoked investment company status in order to allow payment of dividends from distributable reserves. Distributable reserves are represented by the special distributable reserve, the capital reserve gains/(losses) on disposal and the revenue reserve reduced by negative holding reserves (if any) which total £1,075,000 as at 31 December 2017 (2016: £1,451,000).

14. Financial Instruments

The Company's financial instruments comprise equity and loan note investments, cash balances and liquid resources including debtors and creditors.

Classification of financial instruments
The Company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 December 2017 and 31 December 2016:

Fixed asset investments (see note 9) are valued at fair value. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities is represented by their carrying value in the balance sheet.  The Directors believe that the fair value of the assets held at the year end is equal to their book value.

The Company's creditors and debtors are recognised at fair value which is usually the transaction cost or net realisable value if lower.  

Hygea has an overdraft facility of £200,000 with the Royal Bank of Scotland. There is a debenture security held in respect of this overdraft.

15. Financial Risk Management

In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk facing the Company are market risk, credit risk and liquidity risk. The Company's approach to managing these risks is set out below together with a description of the nature and amount of the financial instruments held at the balance sheet date.

Market risk
The Company's strategy for managing investment risk is determined with regard to the Company's investment objective, as outlined on page 6. The management of market risk is part of the investment management process. The Company's portfolio is managed with regard to the possible effects of adverse price movements and with the objective of maximising overall returns to shareholders in the medium term. Investments in unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes. The overall disposition of the Company's assets is regularly monitored by the Board.

Details of the Company's investment portfolio at the balance sheet date are set out on page 12.

68.1% (2016: 64.9%) by value of the Company's net assets comprise investments in unquoted companies held at fair value.  The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 December 2017 would have increased net assets and the total return for the year by £353,000 (2016: £360,000) disregarding the impact of the performance fee; an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount. 

39.3% (2016: 43.9%) by value of the Company's net assets comprises equity securities quoted on AIM. A 10% increase in the bid price of these securities as at 31 December 2017 would have increased net assets and the total return for the year by £204,000 (2016: £244,000) disregarding the impact of the performance fee; a corresponding fall would have reduced net assets and the total return for the year by the same amount.

Credit risk
There were no significant concentrations of credit risk to counterparties at 31 December 2017 or 31 December 2016.

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Board carries out a regular review of counterparty risk. The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date. 

Liquidity risk
The Company's financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally are illiquid. They also include investments in AIM-quoted companies, which, by their nature, involve a higher degree of risk than investments on the main market.  As a result, the Company may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer. 

The Company's liquidity risk is managed and monitored on a continuing basis by the Board in accordance with policies and procedures laid down by the Board.

16. Events After the Balance Sheet Date

On 19 January 2018, shareholders approved a change to the Company's Articles of Association and the approval for the Directors to allot B shares under an offer for subscription expected to be launched shortly. A change to the Investment Policy was also approved as set out on page 6.

17. Contingencies, Guarantees and Financial Commitments

There were no contingencies, guarantees or financial commitments as at 31 December 2017 (2016: £nil).

18. Related Party Transactions

             
The Board acts as the investment manager of the Company.  No remuneration has been paid to the Board during the year in its capacity as investment manager.  The Directors are entitled to participate in a performance bonus as detailed in Note 5.

Charles Breese is a director of OR Productivity and received £nil from OR Productivity in fees for his support during the year (2016: £nil).