Octopus AIM VCT plc
Final Results
Octopus AIM VCT plc today announces the final results for the year ended 28 February 2022.
Octopus AIM VCT plc (“the Company”) is a venture capital trust (“VCT”) which aims to provide shareholders with attractive tax-free dividends and long-term capital growth by investing in a diverse portfolio of predominantly AIM-traded companies. The Company is managed by Octopus Investments Limited (“Octopus” or the “Manager”).
Financial Summary
| 28 February 2022 | 28 February 2021 | |
| Net assets (£’000) | 168,169 | 182,156 |
| Profit/(Loss) after tax (£’000) | (19,459) | 50,850 |
| Net asset value (“NAV”) per share (p) | 104.8 | 124.7 |
| Dividends per share paid in year (p) | 8.5 | 5.5 |
| Total return (%) * | (9.1) | 39.5 |
| Final dividend proposed (p)** | 3.0 | 3.5 |
| Special dividend proposed (p)** | - | 2.5 |
| Total ongoing charges (%)*** | 1.9 | 1.7 |
* Total return is an alternative performance measure calculated as movement in NAV per share in the period plus dividends paid in the period, divided by the NAV per share at the beginning of the period.
**The proposed final dividend will be paid on 12 August 2022 to shareholders on the register on 29 July 2022.
***Total ongoing charges is an alternative performance measure calculated using the AIC recommended methodology.
Chair’s Statement
Introduction
Having been appointed chair at the Company’s Annual General Meeting in July 2021, I am pleased to present the Annual Report of Octopus AIM VCT plc for the year ended 28 February 2022. I would like to welcome all new shareholders who have joined in the year.
It has been another challenging year when the pandemic and its consequences have continued to have an impact on stock market sentiment and movements as well as on peoples’ lives, jobs and the wider economy.
The year started strongly with the country emerging from lockdown in the spring of 2021, helped by the successful roll-out of covid-19 vaccines and growing evidence that the economy had become more resilient to the more recent restrictions imposed as a result of the pandemic. Share prices were buoyed by optimism and by the half year end, at the end of August, the Net Asset Value (NAV) had risen by 10.6% on a total return basis. The second half of the year was more challenging as the economy had to contend with supply chain and labour constraints as well as uncertainty resulting from the threat of further lockdowns as cases rose towards the end of 2021. Although growth exceeded expectations so did inflation which has risen faster and to higher levels than central banks first predicted with the result that further interest rate rises are now firmly on the cards in 2022. The start of 2022 also saw an escalation in international tensions with Russia which culminated in the invasion of Ukraine in late February. This has weighed heavily on market sentiment. Against this background the NAV gave up all of its first half gains and finished the year 9.1% down on a total return basis.
In the year under review AIM raised £8.3 billion of new capital for existing companies, a substantial increase on the £6.2 billion raised in the previous year. It was really encouraging to see existing AIM companies successfully raising funds to see them through the crisis and put them on a growth track on the other side, emphasising the advantages of a public market listing. This was also the year when the number of new issues recovered very strongly (£1.9 billion compared to £0.4 billion in the previous year), and our Investment Manager was able to invest a record amount in new qualifying investments.
Coronavirus
I am pleased to say that in the second year of the crisis, Board meetings and other Company business continued seamlessly on the usual schedule using the by now well established medium of remote communications.
I am sorry that it was not possible to hold an open Annual General Meeting for the second year running in 2021 because of the ongoing coronavirus situation. The Board takes its shareholder communications very seriously and I hope that any shareholder who had a question was able to submit it by email as advised. A summary of the answers to questions we received was posted on the Octopus website. There was also a presentation from the Manager which I hope those who attended found informative. I look forward to welcoming you to our AGM on 21 July 2022.
Performance
The NAV on 28 February 2022 was 104.8p per share, a significant decrease on the NAV of 124.7p per share reported at 28 February 2021. Adding back the 8.5p of dividends paid in the year, gives a total negative return of -9.1%. In the same year, the FTSE AIM All Share Index fell by 11.3%, the FTSE SmallCap (excluding investment companies) Index rose by 12.0% and the FTSE All Share Index rose by 16.0%, all on a total return basis. The AIM index and our own portfolio performed less well than the other indices largely due to our greater exposure to growth stocks in the software, technology and healthcare sectors as inflationary pressures intensified.
Once again stock specific factors had a significant impact on performance, both positive and negative, and these are covered in more detail in the Investment Manager’s Review. In addition, as the year progressed, fears about inflation and the extent of likely interest rate rises increased stock market volatility and caused some rotation away from more highly rated growth stocks. Appetite for risk waned before falling away sharply in response to the deteriorating situation in the Ukraine in February. As a result, some of the earlier stage companies exposed to the new economy saw their share prices fall from recent highs even though the companies continue to perform well. The purpose of a VCT is to provide capital for small growth companies and those companies exposed to the new economy make up a significant proportion of our investment portfolio. These trends worked against us in the second half of the year.
Dividends
In January 2022 an interim dividend for the year to 28 February 2022 of 2.5p was paid to all shareholders. This was in addition to the 3.5p final dividend and 2.5p special dividend that had been paid in August 2021 and which related to the previous financial year ended 28 February 2021. The special dividend was paid following a number of partial disposals of holdings from the portfolio. The Board is recommending a final dividend of 3.0p in respect of the year to February 2022. The Board has considered the level of dividend in the context of the second half NAV fall and more recent share price movements and on this occasion has chosen a final dividend of 3.0p, which brings the total dividends for the year to February 2022 to 5.5p, which is a 5.4% yield based on the share price of 102.5p on 28th February 2022 and greater than the targeted minimum of 5.0p.
Dividend Reinvestment Scheme
In common with many other VCTs in the industry, the Company has established a Dividend Reinvestment Scheme (“DRIS”). Some shareholders have already taken advantage of this opportunity. For investors who do not require income, but value the additional tax relief on their reinvested dividends, this is an attractive scheme and I hope more shareholders will find it useful. In the course of the year 1,868,171 new shares have been issued under this scheme, returning £2.3 million to the Company. The final dividend referred to above will be eligible for the DRIS.
Cancellation of Share Premium Account
At the last Annual General Meeting, shareholders voted to cancel share premium to create a pool of distributable reserves to the amount of £58.0 million. This is a regular occurrence, and common practice, to enable the continued payment of dividends and buyback of shares. A further resolution to cancel share premium is being proposed at this year’s Annual General Meeting
Share Buybacks
During the year to 28 February 2022 the Company continued to buy back shares in the market from selling shareholders and purchased 6,271,209 ordinary shares for a total consideration of £7,522,000. We have maintained a discount of approximately 4.5% to NAV (equating to a 5.0% discount to the selling shareholder after costs), which the Board monitors and intends to retain as a policy which fairly balances the interests of both remaining and selling shareholders. Buybacks remain an essential practice for VCTs, as providing a means of selling is an important part of the initial investment decision and has enabled the Company to grow. As such I hope you will all support the appropriate resolution at the AGM.
Share Issues
On 19 August 2021, a prospectus offer was launched alongside Octopus AIM VCT 2 plc to raise a combined total of up to £30 million with a £10 million over allotment facility. There was strong appetite for the share issue, and it closed fully allotted on 13 September 2021. The Company issued 18,657,106 shares under the offer raising £23.2 million after costs.
Board Changes
Roger Smith, our former Chair resigned from the Board in July 2021. Roger had been a member of this Board since 1998 and I would like to extend our thanks to him on behalf of the Board, shareholders and the Manager for all his many years working on our behalf. We wish him well for the future.
VCT Status
PricewaterhouseCoopers LLP were engaged throughout the year to provide the Board and Manager with advice concerning continuing compliance with HMRC regulations for VCTs. The Board has been advised that the Company is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT. From 1st December 2020 a key requirement is to maintain at least an 80% qualifying investment level, up from the previous level of 70%. As at 28 February 2022, 90.4% of the Company’s portfolio was in VCT qualifying investments.
Annual General Meeting (“AGM”)
The AGM will take place on 21 July 2022 at 12.00pm. Full details of the business to be conducted at the AGM will be given in the Notice of the Meeting included in the Annual Report and Accounts.
We will also be hosting a virtual shareholder event prior to the AGM, on 12 July 2022 at 11:00am. This will enable shareholders to receive an update from the Manager and provide an opportunity for questions to the Board and the Manager. There will not be a presentation from the Manager at the AGM itself.
Formal notices will be sent to shareholders by their preferred method (e-mail or post) and shareholders are encouraged to submit their votes by proxy. We always welcome questions from our shareholders at the AGM, please send these via email to aimagm@octopusinvestments.com by 5.00pm on 18 July 2022. At the AGM a resolution will be proposed to extend the life of the Company until 2028.
Outlook
The Russian invasion of Ukraine resulted in sharp share price falls in late February and March as the stockmarket tried to digest the impact of war in Europe including the effect of sanctions on already rising energy prices. Concerns about how long the current inflationary environment will remain and how far interest rates will have to rise have further unsettled the stock market in April and May despite some encouraging trading updates from companies. More positively, analysts’ forecasts for growth in 2022 look quite modest, reflecting some caution about the challenges companies still face dealing with a bounce back in demand, increased staff turnover, and well documented supply chain issues as we emerge from covid restrictions. This should leave scope for these forecasts to be upgraded as the year progresses and is one of the reasons that individual share prices have bounced off their lows as the company financial results season has progressed.
The portfolio contains 94 holdings across a range of sectors with exposure to some exciting new technologies in the environmental and healthcare sectors. Many of these have been able to raise funds for growth in the past two years leaving them well positioned to achieve their ambitions. These are difficult macroeconomic and geopolitical times, but the balance of the portfolio towards profitable companies remains, and the Manager remains confident that there will continue to be sufficient opportunities to invest our funds in good companies seeking more growth capital.
Neal Ransome
Chair
27 May 2022
Investment Manager’s Review
Introduction
The year under review started well, with share prices rising as the country emerged from the disruption of a further lockdown, helped by a growing optimism that this would be the last based on the successful roll out of covid-19 vaccines. The economy bounced back very strongly in 2021 although the pace of growth stoked inflationary pressures caused by constraints on supply chains and the availability of labour. This tempered investors’ appetite for risk and led to a weakness in some of the more highly rated shares in the portfolio towards the end of 2021 despite an on-going trend to upgrade forecasts. Appetite for risk declined further as international tensions with Russia rose in early 2022, culminating in the shock of the Russian invasion of Ukraine just before the period end. This precipitated a sharp fall in share prices and investors sought to reduce risk by rotating into energy and defence stocks which are not part of the VCT universe. This resulted in the NAV giving up all of its earlier gains and ending the year with a negative total return of 9.1%. March started very negatively but share prices have recovered from their lows in response to an encouraging results season.
In the year to 28 February 2022 AIM once again excelled itself in successfully raising capital for its constituents across the market capitalisation range. For portfolio companies this has left many well financed for future growth plans and has particularly helped many in the healthcare and technology sectors to raise money to develop new treatments and products. New issues have also returned with the pandemic highlighting the attractiveness of a public market listing for accessing growth capital.
The Alternative Investment Market
AIM trailed the other major UK indices in 2021, a reversal of the situation in 2020 when its performance had outshone the wider market. Its higher exposure to growth stocks in the software, technology and healthcare sectors counted against it as sentiment moved against highly rated growth stocks as inflationary pressures intensified, particularly in the second half of the year. Towards the end of the period the FTSE All Share Index moved even further ahead because of its high exposure to resource and Oil and Gas sectors which are not a large part of AIM and not VCT qualifying activities. In the 12 months to February 2022 the AIM Index fell 11.3% compared with a gain of 12.0% for the FTSE SmallCap index (excluding investment companies) and 16.0% for the FTSE All Share Index on a total return basis. Although VCTs have additional constraints on what they can invest in, the AIM index is considered to be the most appropriate broad equity market index for comparative purposes, given the nature of the underlying investments. The FTSE Smaller Companies and All Share indices provide wider market context. There were some quite sharp movements away from growth and momentum driven shares as investors sought value in more traditional sectors.
In the interim report we highlighted the success of AIM in raising new capital for its existing members and a resurgence in the number of companies looking to float on the market. In the year to 28 February 2022 AIM raised £8.3 billion of new capital for existing companies which compares to a figure of £6.2 billion the previous year.
It was really encouraging to see AIM raise £1.9 billion for new listings, a huge advance on the figure of £0.4 billion in each of the previous two years. Anecdotally, we are still hearing about a healthy pipeline of new issues from brokers and we hope that the current more volatile market conditions do not affect this. VCTs play a significant part in the funding process and we identify below the companies we have invested in during the year, which include many that are developing technologies to help solve the climate and healthcare problems that face us.
Performance
Adding back the 8.5p of dividends paid in the year, the NAV total return fell by 9.1%. This compares with a fall in the FTSE AIM All Share Index of 11.3%, a rise in the FTSE SmallCap (excluding investment companies) of 12.0% and a rise in the FTSE All Share Index of 16.0%, all on a total return basis, the wide divergence in the performance of the AIM and other indices is a reversal of what happened in the previous year and is covered in detail in the section on the Alternative Investment Market. It was a year characterised by individual months of significant market volatility as investors reacted to unfolding events. The first half was generally positive as bounce-back growth in the economy exceeded expectations and was generally accompanied by upgrades to what were very conservatively set forecasts against the background of another lockdown early in 2021. The second half of the year was much more difficult as investors confronted rising inflationary and interest rate expectations as global economies responded to unprecedented growth in demand with all the resulting pressures on supply chains and labour costs. The consensus moved from inflation being transitory to a longer term issue particularly as a steep rise in energy costs emerged as an additional factor. There was a growing acceptance that interest rates would have to rise sooner and faster than had been expected earlier in the year causing some of the higher rated shares in the portfolio to come under pressure despite mostly positive updates from companies. The deepening crisis in Ukraine led to further risk aversion with the result that the Net Asset Value fell sharply at the end of the period and post the period end. It is interesting to note that many of the standout performers in the first half ended up detracting from performance for the year as a whole as the stockmarket entered a phase of rapid sector rotation away from the pharmaceutical and technology sectors, following the lead of the US.
There was a much more mixed picture from the pharmaceutical and healthcare sectors with share prices affected by a fall in US sector valuations in the second half of the year. Among the largest detractors for the year were Renalytix AI and Maxcyte, two stars of the first half with US listings on the NASDAQ exchange. We had taken profits in Renalytix earlier in the year and we view both as having good potential newsflow justifying their positions in the portfolio. Other detractors in the sector were Creo Medical whose roll-out of its novel endoscopic devices had been slowed by the impact of covid on hospital procedures, but which had a successful fundraising to finance further growth, EKF which had benefitted from strong covid related revenues in 2021 and Ixico which unfortunately lost a multi-million pound contract when a Phase 3 drugs trial in Huntingdon’s disease was stopped. It will take time for Ixico to re-build its credibility despite winning further contracts since. Reneuron was another detractor after its drug trial for the treatment of Retinisis Pigmentosa ran into difficulties. It is now concentrating on developing revenues from its Exosome technology platform. Not all share prices in the sector were affected as badly. Ergomed had another outstanding year with analysts upgrading profits several times. Despite this, in the second half its shareprice was one of those affected by the general de-rating of growth companies although positive results post the period end have restored some of this in recent weeks. Ergomed has a range of services it can offer large pharmaceutical companies including the monitoring of drugs for regulatory purposes and the conducting of drugs trials for very rare diseases. We expect the strong organic growth to continue in the current year although we did take some profits in the shares into rising prices in order to manage the overall size of the holding.
A significant driver of performance continued to be upgrades to profit forecasts. Next Fifteen was buoyed by the need for companies and government institutions to embrace change and new ways of doing things in the light of covid challenges and Learning Technologies successfully raised money to acquire GP Strategies. Learning Technologies shares performed well in the year although investors have not yet factored in the full potential for upgrades following the deal. Hasgrove, a private company providing intranet software as a service continued its profitable growth path and its shares were revalued upwards in the year as a consequence. Other outperformers as a consequence of profit upgrades included Vertu Motors, Judges Scientific and Brooks Macdonald. All three are longstanding holdings in the portfolio. In online consumer facing businesses Sosandar and Popsa (an unquoted investment) outstripped growth expectations and Popsa closed a new round of funding at a significantly increased valuation in December. Online clothing retailer Sosandar’s tie-ups with M&S, John Lewis and Next have been going well, advancing the point of profitability. Gear4Music had started the year well but disappointed at the end of the period as a result of disruption to its supply chain.
The biggest detractor from performance in the year was Trackwise Designs which had risen to new highs on the back of a large contract from an electric bus manufacturer. The shares fell on the news that production was delayed and this meant that it had to call on investors for further funding to cover the costs of the delay. We had taken some profits but it was still one of the larger holdings when the news broke.
GB Group was another detractor from performance after many years of positive contributions to the movement in the NAV. It made the strategically important acquisition of US based Acuant, adding to its ability to detect identity fraud, raising £305 million in equity as well as debt to pay for it. The equity was raised at a discount and investor caution about highly rated shares has meant that they have struggled to perform since. We expect the situation to change given time and results showing the benefit of the acquisition.
Among the smaller and earlier stage companies many of them gave up earlier strong gains as the year progressed and appetite for risk waned. We had taken profits in some of these when we had considered that the share price had run too far in the short term but we recognise that many of them will take time to demonstrate progress and will only be rewarded by share price gains when they do so. The majority are well funded and so will have the chance to develop their technologies, many of which aim to solve climate and healthcare challenges.
Investing for a VCT involves backing companies when they are small and still at an early stage of development and share price progress depends on them being noticed by a wider circle of investors as they produce results and develop their businesses over time. This often takes longer than expected and such companies remain potentially vulnerable until they achieve profitability. Our fear two years ago was that the pandemic would make raising enough finance to achieve this much harder. To the credit of AIM investors this has not turned out to be the case and even those companies that faced more difficult trading conditions have had the chance to strengthen their balance sheets.
Portfolio Activity
Having made thirteen qualifying investments at a total cost of £12.6 million in the first half of the year, we added seven qualifying investments totalling £9.0 million in the second half. This made a record total investment of £21.6 million in qualifying investments for the year, a significant increase on last year’s £9.6 million, reflecting a busy AIM market for fundraisings and the resumption of new issues.
Of the thirteen first half investments, three were follow-ons into Cloudcall Group, The British Honey Company and Engage XR Holdings plc and six were new entrants to the AIM market; In The Style, Parsley Box, Glantus, Lung Life, Spectral MD and GENinCode. Eluceda was a small investment into a private company. In addition we made three new qualifying investments into Evgen Pharma, Polarean and Crimson Tide, all existing AIM companies whose progress we had been watching for some time.
We invested in four new issues in the second half of the year. Three of these are addressing green energy solutions. We invested £1.1 million into Gelion which has developed zinc bromide batteries that are cheaper, more robust and safer than lithium-ion batteries. They are initially being targeted as a replacement for diesel generators and for green energy storage although they have many potential uses. The company has also developed some performance additives which can improve the safety and longevity of lithium-ion batteries which if they can be commercially adopted will have widespread attraction as attention focuses on the shortage of raw materials for the anticipated demand as the world electrifies. We invested £3.0 million in Libertine, which has developed a powertrain solution for use with a variety of different fuels. It is designed to be easily adaptable for trucks so that fleet operators can reduce their carbon footprint in an affordable and practical way. The technology is still at prototype stage. We invested £1.8 million into Clean Power Hydrogen that has developed a membrane free technology designed to produce hydrogen from renewable power. We also invested £0.5 million into Strip Tinning, a supplier of smart connectors to the automotive industry. Also in the area of green energy solutions we made an investment of £1.0 million into Velocys, an existing AIM company that is developing and commercialising a technology to produce low carbon aviation fuel.
We made two follow-on investments in the second half; a further £0.4 million into Popsa which continues to have very good growth momentum. It remains a private company. The other investment was £1.2 million into Feedback. It has two significant opportunities to pursue, one with the new NHS treatment hubs and the other in India.
During the year we took profits in several holdings in response to rising share prices. We sold part of the holdings in Ergomed, PCI Pal, Renalytix AI, Reneuron Intelligent Ultrasound, GB Group, Access Intelligence, Gear4Music and Trackwise Designs. We also sold the entire Parsley Box holding at a loss after a series of profit warnings. Vectura, Cloudcall and Clinigen were all subject to successful cash takeover bids although Clinigen has been concluded since the period end. In all, disposals made a £4.0 million profit over original cost and generated £6.3 million of cash proceeds.
Liquidity
The issue of liquidity within investment funds has remained a topic of discussion this year. Shareholders may be interested to know that at the year end 23.8% of the Company’s net assets were held in cash or collective investment funds providing shortterm liquidity, 70.9% in individual quoted shares and 5.5% was held in unquoted single company investments. Shareholders should be aware that a proportion of the quoted holdings may have limited liquidity owing to the size of the investee company and the overall proportion held by the Company.
Non-qualifying investments are used to manage liquidity while awaiting new qualifying investment opportunities. Although we still hold some existing non-qualifying AIM holdings where we see the opportunity for further share price progress, we continued to reduce some of these holdings in the year under review. In the year we increased our holding in the FP Octopus Multi-Cap Income Fund as well as adding a small new holding in the FP Octopus Future Generation Fund. This strategy is designed to obtain a better return on funds awaiting investment than the very low rates available on cash. In the year under review £1.7 million was invested into the FP Octopus Multi-Cap Income Fund and £0.4 million into the FP Octopus Future Generation Fund.
VCT Regulations
There have been no further changes to the VCT regulations since publication of the previous set of audited accounts. As a reminder, the key requirements are that 30% of any funds raised should be invested in qualifying holdings within 12 months of the end of the accounting period in which the shares were issued, and the Company has to maintain a minimum of 80% of the portfolio (at cost) invested in qualifying holdings. We are determined to maintain a threshold of quality and to invest where we see the potential for returns from growth. Over time there has been a gradual change to the profile of the portfolio towards earlier stage companies, although we continue to hold the larger market capitalisation companies, in which we invested several years ago as qualifying companies, or which we bought in the market prior to the rule changes where we see the potential for them to continue to grow.
In order to qualify, companies must:
• have fewer than 250 full time equivalent employees;
• have less than £15 million of gross assets at the time of investment and no more than £16 million immediately post investment;
• be less than seven years old from the date of their first commercial sale (or 10 years if a knowledge intensive company) if raising State Aided (ie VCT) funds for the first time;
• have raised no more than £5 million of State Aided funds in the previous 12 months and less than the lifetime limit of £12 million (or £10 million in 12 months and a £20 million lifetime limit if a knowledge intensive company); and
• produce a business plan to show that the funds are being raised for growth and development.
Coronavirus
Although the pandemic and its consequences remained a very real problem for individuals, companies and the economy it was noticeable in 2021 that many companies had learned to live with the challenges posed by repeated lockdowns, and more latterly with the stress of sudden bounceback in demand and we have been struck by the resilience shown by the companies during what has been a particularly challenging two years. The shock of the coronavirus pandemic led many companies to concentrate on increasing the efficiency of their operations and to embrace technology. Additionally the majority of investee companies are business rather than directly consumer facing, and many have recurring revenues. When the pandemic struck, forecasts were withdrawn in many cases and then only cautiously reinstated. The result was that expectations were upgraded significantly as 2021 progressed and visibility improved, providing a support to share prices.
Long-term responsible investing
The investment team have always been invested as long-term responsible shareholders and supported businesses in the process of improving their corporate governance structure. As part of the investment process, the team is incorporating a material risk review depending on the exposure of the underlying business where appropriate. These risks span from environmental (emissions, energy management, waste, ecological impact), social (privacy, security, product quality, selling practices), human (labour, health and safety, diversity), business model (product design, supply chain, material sourcing) to leadership (ethics, competitive behaviour, regulatory, critical incidents and risk management). The team assess the exposure and how well the company is managing these material risks. The team believes that assessing these factors allows for informed investment analysis and it forms part of the investment strategy. The Manager takes its duty as a shareholder seriously and acts as a steward of capital. This includes regular engagement with the independent non-executive members of boards.The team’s stewardship and engagement policy can be found here (https:// media. octopusinvestments.com/m/519bad6a06ce2d77/original/ Octopus-Quoted-Smaller-Companies-Engagement-Policy.pdf).
Outlook and Future Prospects
The increased volatility that we were already seeing at the year end has continued as the terrible events in the Ukraine have unfolded, having an immediate impact on appetite for risk. Economists are still struggling to measure the impact of war, Russian sanctions and the already present problem of inflation and energy price spikes on economic growth although there is still a consensus around the conservative nature of earnings forecasts at this stage of the year. After a long period when the stock market was driven by growth and momentum, investors are taking a much more cautious stance rotating into less highly rated defensive sectors as protection against rising inflation and interest rates. This has caused the retreat of some of the more highly rated shares on AIM and contributed to the recent underperformance of the AIM Index after a very strong two years. Some individual companies have been caught out by the challenge of managing stretched supply chains and staff shortages against the background of very strong growth as the global economy has bounced back from the pandemic. More recently rapidly rising energy costs have been an additional obstacle to manage. However, for many of the already established companies in the portfolio a background of very modest economic growth is helpful to meeting forecasts which appear to be set conservatively at this stage of the year, particularly for those able to pass on increased costs.
The Octopus Quoted Companies team
27 May 2022
Viability Statement
In accordance with provision 4.31 of The UK Corporate Governance Code 2018 the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the “Going Concern” provision. The Board conducted this review for a period of five years, which was considered to be a reasonable time horizon given that the Company has raised funds under an offer for subscription which closed to new applications on 13 September 2021 and, under VCT rules, subscribing investors are required to hold their investment for a five year period in order to benefit from the associated tax reliefs. The Board regularly considers the Company’s strategy, including investor demand for the Company’s shares, and a five year period is considered to be a reasonable time horizon for this.
The Board carried out a robust assessment of the emerging and principal risks facing the Company and its current position. This includes the impact of the coronavirus pandemic, the war in Ukraine and any other risks which may adversely impact its business model, future performance, solvency or liquidity. Particular consideration was given to the Company’s reliance on, and close working relationship with, the Manager. The principal risks faced by the Company and the procedures in place to monitor and mitigate them are set out below.
The Board has also considered the liquidity of the underlying investments and the Company’s cash flow projections considering the material inflows and outflows of the Company including investment activity, buybacks, dividends and fees and found these to be realistic and reasonable. The Company’s cash flow includes cash equivalents which are short-term, highly liquid investments.
Based on the above assessment the Board confirms that it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to 28 February 2027.
Emerging and Principal Risks, Risk Management and Regulatory Environment
In accordance with the Listing Rules under which the Company operates, the Board is required to comment on the potential risks and uncertainties which could have a material impact on the Company’s performance.
The Board carries out a review of the risk environment in which the Company operates. The main areas of risk identified by the Board are as follows:
| Risk | Mitigation | Movement in year |
| VCT qualifying status risk: The Company is required at all times to observe the conditions laid down in the Income Tax Act 2007 and the Finance Act 2018 for the maintenance of approved VCT status. The loss of such approval could lead to the Company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the Company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment. | Prior to investment, Octopus seeks assurance from the Company’s VCT status adviser that any portfolio asset will meet the legislative requirements for VCT investments. Furthermore, Octopus continually monitors the Company’s compliance with VCT regulations in respect of cash and nonqualifying holdings, distributions, and deployment of funds raised, to ensure ongoing compliance with VCT legislation. Regular updates on compliance are also provided to the Board throughout the year. Additionally, PwC has been engaged throughout the year by the Company to undertake an independent VCT status monitoring role reporting to the Board bi-annually. | No change |
| Investment risk: Most of the Company’s investments are into companies admitted to trading on AIM and AQSE Exchange which are VCT qualifying holdings and so, by their nature, entail a higher level of risk and lower liquidity than investments in larger quoted companies. The Company also makes non-qualifying investments into FP Octopus UK Micro Cap Growth Fund, FP Octopus UK Multi Cap Income Fund and FP Octopus UK Future Generations Fund. FP Octopus UK Micro Cap Growth Fund invests into smaller companies quoted on the LSE, AIM and AQSE markets. FP Octopus UK Multi Cap Income Fund and FP Octopus UK Future Generations Fund invest into companies quoted on the LSE, AIM and AQSE markets. Non-qualifying investments have also been made into OPM which invests via collective investment schemes into global markets. As markets fluctuate investments and the income derived from any of the collective investments referred to above may go down as well as up, potentially resulting in investors not getting all their capital back. | The Directors and Octopus aim to limit the risk attached to the portfolio by careful selection and timely realisation of investments, carrying out rigorous due diligence procedures and maintaining a diversified portfolio in terms of business life cycle and sector. The Board reviews the investment portfolio with Octopus on a regular basis. The FP Octopus UK Micro Cap Growth Fund, FP Octopus UK Multi Cap Income Fund and FP Octopus UK Future Generations Fund are all regulated collective investment schemes with daily pricing and liquidity. The MicroCap Fund is invested in small companies and the other funds are invested across the wider UK stock market. The OPM Service is a discretionary management service offering a range of risk-targeted portfolios which invest in underlying collective investment schemes. The portfolios selected target defined levels of volatility at the lower end of the risk spectrum and have been specifically chosen for their lower risk investment approach to accessing global markets and the ability to offer daily liquidity. | No change |
| Liquidity risk: The risk that the Company’s available cash will not be sufficient to make new investments, meet its liabilities or maintain its dividend policy. | The Company maintains liquidity by holding adequate levels of cash and OEIC funds which are available within 7 days. The Manager seeks to maintain a proportion of the Company’s assets in cash or cash equivalents and liquid investments in order to balance irregular cash flows from realisations. At the balance sheet date the cash and cash equivalents which includes current asset investments amounted to 23.8% of net assets (2021: 28.2%). | No change |
| Valuation Risk: Inaccuracies in the valuation of investment assets may result in the Company net asset position being misrepresented and errors in the reported NAV per share. | Investments traded on AIM and AQSE Exchange are valued by Octopus using closing bid prices as reported on Bloomberg. Where investments are unquoted or where there are indicators bid price is not appropriate, alternative valuations techniques are employed in accordance with current International Private Equity and Venture Capital (“IPEV”) guidelines, December 2018. These valuations are reviewed by the Board quarterly. Investment in Octopus Portfolio Manager (“OPM”), FP Octopus UK Micro Cap Growth Fund, FP Octopus UK Multi Cap Income Fund and FP Octopus UK Future Generations Fund are all valued with reference to the daily prices which are published by Fund Partners, the Authorised Corporate Director. | No change |
| Economic and Price risk: Macroeconomic conditions such as government regulation, political instability, inflation or recession could cause volatility in the markets, damaging both the price and underlying value of Company investments. This includes the potential impacts of the Coronavirus outbreak. This risk is amplified for smaller companies earlier in their life cycle. | To mitigate these risks Octopus constantly monitors the markets and the portfolio companies, providing performance update to the Board at each meeting. The risk of material decline in the value of a single security is further mitigated by holding a diversified portfolio, across a broad range of sectors. The Manager continues to monitor the impact of macroeconomic conditions including the coronavirus pandemic and the war in Ukraine. The continuous assessment ensures that exposure to the risks for each portfolio company will be addressed, and appropriate actions, where possible, will be implemented. | Increase due to war in Ukraine |
| Regulatory and Reputational risk: In addition to specific VCT legislation, the Company is required to comply with the Companies Act, UK Listing Authority regulations and Financial Statements and notes must be prepared under UK GAAP. The Company is also a small registered Alternative Investment Fund (“AIF”) and must comply with the requirements of the AIFM Management Directive. Breach of some of these could result in penalties including suspension of the Company’s Stock Exchange listing, financial penalties, qualified audit report or loss of shareholder trust. | Day-to-day operational oversight of the Company is carried out by the Manager. The Manager conducts rigorous on boarding procedures for new employees and conduct regular staff reviews and training to ensure that teams charged with oversight of the Company are appropriately qualified to conduct their roles and ensure compliance with relevant legislation. The Board are updated regularly on all regulatory and compliance matters and take specific legal advice where appropriate. | No change |
| Operational risk: The Board is reliant on Octopus to manage investments effectively, and manage the services of a number of third parties, in particular the registrar and tax advisers. A failure of the systems or controls at Octopus or third-party providers could lead to an inability to provide accurate reporting and accounting and to ensure adherence to VCT rules. | The Board reviews annually, with professional assistance where appropriate, the system of internal controls, both financial and non-financial, operated by the Company and the Manager (to the extent the latter are relevant to the Company’s internal controls). These include controls designed to ensure that the Company’s assets are safeguarded and that proper accounting records are maintained. The Manager has operated effectively throughout the coronavirus pandemic with staff working online and mostly based at home. Other service providers have operated without a marked reduction in service. | No change |
| Emerging Risk: The Board has considered emerging risks. The Board seeks to mitigate risk by setting policy, regularly reviewing performance, enforcing contractual obligations and monitoring progress and compliance. In the mitigation and management of these risks, the Board applies the principles detailed in the Financial Reporting Council’s “Guidance on Risk Management, Internal Control and Related Financial and Business Reporting”. | The Board along with the Manager are regularly reviewing the risks, the most recent emerging risk being the war in Ukraine. The situation is still developing and we will continue to monitor it and the potential impacts. | Increase due to war in Ukraine |
Directors' Responsibilities Statement
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the financial statements and have elected to prepare the Company’s Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including FRS 102 – “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for the Company for that period.
In preparing these Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;
• prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• prepare a Strategic Report, a Director’s Report and Director’s Remuneration Report which comply with the requirements of the Companies Act 2006.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Website Publication
The Directors are responsible for ensuring the Annual Report and the Accounts are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the Financial Statements contained therein.
Directors’ responsibilities pursuant to Disclosure Guidance and Transparency Rules 4 (DTR4)
Roger Smith (Chairman), Stephen Hazell-Smith, Joanne Parfrey Neal Ransome and Andrew Boteler, the Directors, confirm to the best of their knowledge that:
• the financial statements have been prepared in accordance with the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (“FRS 102”) and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and
• the Annual Report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description of the principal risks and uncertainties that it faces. For and on behalf of the Board
Neal Ransome
Chair
27 May 2022
Income Statement
| | Year to 28 February 2022 | Year to 28 February 2021 | ||||
| Revenue £'000 | Capital £’000 | Total £’000 | Revenue £'000 | Capital £’000 | Total £’000 | |
| Gain on disposal of fixed asset investments | - | 1,001 | 1,001 | - | 4,361 | 4,361 |
| (Loss)/Gain on disposal of current asset investments | - | (2) | (2) | - | 58 | 58 |
| (Loss)/Gain on valuation of fixed asset investments | - | (17,203) | (17,203) | - | 44,908 | 44,908 |
| (Loss)/Gain on valuation of current asset investments | - | (313) | (313) | - | 3,655 | 3,655 |
| Investment Income | 760 | 134 | 894 | 472 | 51 | 523 |
| Investment management fees | (765) | (2,296) | (3,061) | (487) | (1,461) | (1,948) |
| Other expenses | (775) | - | (775) | (707) | - | (707) |
| Profit/(loss) before tax | (780) | (18,679) | (19,459) | (722) | 51,572 | 50,850 |
| Tax | - | - | - | - | - | - |
| Total comprehensive income/(loss) after tax | (780) | (18,679) | (19,459) | (722) | 51,572 | 50,850 |
| Earnings per share – basic and diluted | (0.5p) | (12.4p) | (12.9p) | (0.5p) | 37.9p | 37.4p |
• The ‘Total’ column of this statement represents the statutory Income Statement of the Company; the supplementary revenue return and capital return columns have been prepared in accordance with the AIC Statement of Recommended Practice.
• 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, as well as OEIC funds.
The Company has no recognised gains or losses other than the results for the period as set out above. Accordingly a Statement of Comprehensive Income is not required.
Balance Sheet
| As at 28 February 2022 | As at 28 February 2021 | |||
| £’000 | £’000 | £’000 | £’000 | |
| Fixed asset investments | 129,226 | 129,915 | ||
| Current assets: | ||||
| Investments | 16,543 | 16,212 | ||
| Money market funds | 1,326 | 1,326 | ||
| Debtors | 329 | 1,864 | ||
| Applications cash* | 246 | 162 | ||
| Cash at bank | 21,910 | 33,724 | ||
| 40,354 | 53,288 | |||
| Creditors: amounts falling due within one year | (1,411) | (1,047) | ||
| Net current assets | 38,943 | 52,241 | ||
| Total assets less current liabilities | 168,169 | 182,156 | ||
| Called up equity share capital | 1,605 | 1,461 | ||
| Share premium | 25.450 | 57,966 | ||
| Capital redemption reserve | 236 | 173 | ||
| Special distributable reserve | 105,258 | 67,477 | ||
| Capital reserve realised | (20,762) | (21,945) | ||
| Capital reserve unrealised | 58,307 | 78,169 | ||
| Revenue reserve | (1,925) | (1,145) | ||
| Total equity shareholders’ funds | 168,169 | 182,156 | ||
| NAV per share – basic and diluted | 104.8p | 124.7p | ||
*Cash held but not yet allotted
The statements were approved by the Directors and authorised for issue on 27 May 2022 and are signed on their behalf by:
Neal Ransome
Chair
Company number: 03477519
Statement of changes in Equity
| Share capital £’000 | Share premium £’000 | Capital redemption reserve £’000 | Special distributable reserves* £’000 | Capital reserve – realised* £’000 | Capital reserve – unrealised £’000 | Revenue reserve* £’000 | Total £’000 | ||
| As at 1 March 2021 | 1,461 | 57,966 | 173 | 67,477 | (21,495) | 78,169 | (1,145) | 182,156 | |
| Comprehensive income for the year: | |||||||||
| Management fee allocated as capital expenditure | - | - | - | - | (2,296) | - | - | (2,296) | |
| Current year gains on disposal | - | - | - | - | 999 | - | - | 999 | |
| Current period gains on fair value of investments | - | - | - | - | - | (17,516) | - | (17,516) | |
| Capital investment income | - | - | - | - | 134 | - | - | 134 | |
| Loss after tax | - | - | - | - | - | - | (780) | (780) | |
| Total comprehensive income for the year | - | - | - | - | (1,163) | (17,516) | (780) | (19,459) | |
| Contributions by and distributions to owners: | |||||||||
| Repurchase and cancellation of own shares | (63) | - | 63 | (7,522) | - | - | - | (7,522) | |
| Issue of shares | 207 | 27,030 | - | - | - | - | - | 27,237 | |
| Share issue costs | - | (1,580) | - | - | - | - | - | (1,580) | |
| Dividends paid | - | - | - | (12,663) | - | - | - | (12,663) | |
| Total contributions by and distributions to owners | 144 | 25,450 | 63 | (20,185) | - | - | - | 5,472 | |
| Other movements: | |||||||||
| Cancellation of share premium | - | (57,966) | - | 57,966 | - | - | - | - | |
| Prior years’ holding gains now realised | - | - | - | - | 2,346 | (2,346) | - | - | |
| Total other movements | - | (57,966) | - | 57,966 | 2,346 | (2,346) | - | - | |
| Balance as at 28 February 2022 | 1,605 | 25,450 | 236 | 105,258 | (20,762) | 58,307 | (1,925) | 168,169 | |
| Share capital £’000 | Share premium £’000 | Capital redemption reserve £’000 | Special distributable reserves* £’000 | Capital reserve – realised* £’000 | Capital reserve – unrealised £’000 | Revenue reserve* £’000 | Total £’000 | ||
| As at 1 March 2020 | 1,234 | 65,883 | 134 | 43,630 | (26,179) | 31,371 | (423) | 115,110 | |
| Comprehensive income for the year: | |||||||||
| Management fee allocated as capital expenditure | - | - | - | - | (1,461) | - | - | (1,461) | |
| Current year gains on disposal | - | - | - | - | 4,419 | - | - | 4,419 | |
| Current period gains on fair value of investments | - | - | - | - | - | 48,563 | - | 48,563 | |
| Capital investment income | - | - | - | - | 51 | - | - | 51 | |
| Loss after tax | - | - | - | - | - | - | (722) | (722) | |
| Total comprehensive income for the year | - | - | - | - | 3,009 | 48,563 | (722) | 50,850 | |
| Contributions by and distributions to owners: | |||||||||
| Repurchase and cancellation of own shares | (39) | - | 39 | (3,940) | - | - | - | (3,940) | |
| Issue of shares | 266 | 29,347 | - | - | - | - | - | 29,613 | |
| Share issue costs | - | (1,842) | - | - | - | - | - | (1,842) | |
| Dividends paid | - | - | - | (7,635) | - | - | - | (7,635) | |
| Total contributions by and distributions to owners | 227 | 27,505 | 39 | (11,575) | - | - | - | 16,196 | |
| Other Movements: | |||||||||
| Cancellation of share premium | - | (35,422) | - | 35,422 | - | - | - | - | |
| Prior years’ holding gains now realised | - | - | - | - | 1,765 | (1,765) | - | - | |
| Total other movements | - | (35,422) | - | 35,422 | 1,765 | (1,765) | - | - | |
| Balance as at 28 February 2021 | 1,461 | 57,966 | 173 | 67,477 | (21,495) | 78,169 | (1,145) | 182,156 | |
*Included in these reserves is an amount of £82,571,000 (2021: £44,387,000) which is considered distributable to shareholders.
Cash Flow Statement
| Year to 28 February 2022 | Year to 28 February 2021 | |
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Profit before tax | (19,459) | 50,850 |
| Adjustments for: | ||
| Increase in debtors | (136) | (114) |
| Increase/(decrease) in creditors | 470 | 123 |
| Gain on disposal of fixed asset investments | (1,001) | (4,361) |
| Gain on disposal of current asset investments | 2 | (58) |
| Gain on valuation of fixed asset investments | 17,203 | (44,908) |
| Gain on valuation of current asset investments | 313 | (3,655) |
| Non-cash distributions | (134) | (51) |
| Cash from operations | (2,742) | (2,174) |
| Income taxes paid | - | - |
| Net cash generated from operating activities | (2,742) | (2,174) |
| Cash flows from investing activities | ||
| Purchase of fixed asset investments | (21,639) | (9,638) |
| Proceeds from sale of fixed asset investments | 7,932 | 9,070 |
| Purchase of current asset investments | (2,250) | (5,040) |
| Proceeds from sale of current asset investments | 1,604 | 17,400 |
| Net cash flows from investing activities | (14,353) | 11,792 |
| Cash flows from financing activities | ||
| Movement in applications account | (106) | (16,293) |
| Purchase of own shares | (7,522) | (3,940) |
| Share issues | 25,657 | 28,196 |
| Share issue costs | (2,342) | (1,842) |
| Dividends paid | (10,321) | (6,218) |
| Net cash flows from financing activities | 5,366 | (97) |
| (Decrease)/Increase in cash and cash equivalents | (11,730) | 9,521 |
| Opening cash and cash equivalents | 35,212 | 25,691 |
| Closing cash and cash equivalents | 23,482 | 35,212 |
| Cash and cash equivalents is represented by: | ||
| Cash at bank | 21,910 | 33,724 |
| Applications cash | 246 | 162 |
| Money market funds | 1,326 | 1,326 |
| Total cash and cash equivalents | 23,482 | 35,212 |
Post Balance Sheet Events
The following events occurred between the balance sheet date and the signing of these Financial Statements.
• a follow on investment totalling £180,000 completed in Verici Dx plc;
• a follow on investment totalling £61,000 completed in The British Honey Company plc;
• a follow on investment totalling £384,000 completed in Oberon Investments Group plc;
• a follow on investment totalling £90,000 completed in FP Octopus UK Future Generation Fund;
• a follow on investment totalling £6,000 completed in FP Octopus UK Micro Cap Growth Fund;
• a partial disposal of 242,700 shares totalling £722,000 in Advanced Medical Solutions Group plc;
• a partial disposal of 69,470 shares totalling £12,000 in Diurnal Group plc;
• a partial disposal of 30,000 shares totalling £433,000 in Next Fifteen Communication Group plc;
• a partial disposal of 28,892 shares totalling £12,000 in Merit Group plc;
• a partial disposal of 62,250 shares totalling £576,000 in Clinigen Group plc; and
• a full disposal of 420,943 shares totalling £150,000 in Synairgen plc.
The following shares have been bought back since the year end:
• 24 March 2022: 513,628 shares at a price of 99.2p per share;
• 21 April 2022: 220,376 shares at a price of 99.7p per share;and
• 12 May 2022: 48,702 shares at a price of 91.3p per share.
The following shares have been alloted since the year end:
• 14 April 2022: 144,759 shares at a price of 110.8p per share.
Notes to the financial statements
1. Principal accounting policies
The Company is a Public Limited Company (“plc”) incorporated in England and Wales and its registered office is 33 Holborn, London EC1N 2HT.
The Company’s principal activity is to invest in a diverse portfolio of predominately AIM-traded companies with the aim of providing shareholders with attractive tax-free dividends and long-term capital growth.
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 Financial Reporting Standard 102 – The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland’ (“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 (issued 2014 and updated in October 2019 with consequential amendments).’
The principal accounting policies have remained unchanged from those set out in the Company’s 2021 Annual Report and Accounts.
2. Income
Accounting policy
Dividends receivable are brought into account when the Company’s right to receive payment is established and it is probable that payment will be received. Fixed returns on debt and money market securities are recognised on a time apportionment basis so as to reflect the effective yield, provided there is no reasonable doubt that payment will be received in due course.
Investment income includes interest earned on money market securities and includes income tax withheld at source. Dividend income is shown net of any related tax credit. Dividends are allocated to revenue or capital depending on whether the dividend is of a revenue or capital nature.
Disclosure
| 28 February | 28 February | |
| 2022 | 2021 | |
| £’000 | £’000 | |
| Dividends receivable from fixed asset investments | 715 | 425 |
| In-specie dividend* | 134 | 51 |
| Loan note interest receivable | 45 | 45 |
| Income receivable on money market securities and bank balances | - | 2 |
| 894 | 523 |
*The Company received shares in Trellus Health as a result of an in-specie dividend from EKF Diagnostics Holdings plc. In the prior period the Company received shares in Verici Dx plc as a result of an in-specie dividend from Renalytix AI plc. These have been treated as capital income.
3. Investment management fees
| 28 February 2022 | 28 February 2021 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Investment management fee | 765 | 2,296 | 3,061 | 487 | 1,461 | 1,948 |
Octopus provides investment management and accounting and administration services to the Company under a management agreement which initially ran with Close Investment Limited from 3 February 1998 and was then novated to Octopus for a period of five years with effect from 29 July 2008 and may be terminated at any time thereafter by not less than 12 months’ notice given by either party. No compensation is payable in the event of terminating the agreement by either party, if the required notice period is given. The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided, or the required notice period was given. The management fee is an annual charge set at 2% of the Company’s net assets, less deductions outlined below calculated on a quarterly basis.
During the year Octopus charged gross management fees of £3,723,000 (2021: £2,501,000). When the various allowances detailed below are included, the net management fees for the year is £3,061,000 (2021: £1,948,000). At the year end there was £834,000 payable to Octopus (2021: £481,000). Octopus received £515,000 as a result of upfront fees charged on allotments of Ordinary shares (2021: £588,000).
The Company now pays ongoing adviser charges to Independent Financial Advisers (“IFA’s”). Ongoing adviser charges are an ongoing fee of up to 0.5% per annum for a maximum of 9 years paid to Advisers who are on an advised and ongoing fee structure. The Company is rebated for this cost by way of a reduction in the annual management fee. For the year to 28 February 2022 the rebate received was £290,000 (2021: £259,000).
The Company also facilitates upfront fees to IFAs where an investor has invested through a financial adviser and has received upfront advice. Where an investor agrees to an upfront fee only, the Company can facilitate a payment of an initial adviser charge of up to 4.5% of the investment amount. If the investor chooses to pay their intermediary/adviser less than the maximum initial adviser charge, the remaining amount will be used for the issue and allotment of additional new shares for the investor. In these circumstances the Company does not facilitate ongoing annual payments. To ensure that the Company is not financially disadvantaged by such payment, a notional ongoing advisor charge equivalent to 0.5% per annum will be deemed to have been paid by the Company for a period of nine years. The Company is rebated for this cost, also by way of a reduction in the annual management fee. For the year to 28 February 2022 the rebate received was £272,000 (2021: £216,000).
The Company also receives a reduction in the management fee for the investments into other Octopus managed funds, being the Octopus Portfolio Manager, Micro Cap, Multi Cap and Future Generations products, to ensure the Company is not double charged on these products. This amounted to £100,000 for the year to 28 February 2022 (2021: £78,000).
The management fee has been allocated 25% to revenue and 75% to capital, in line with the Board’s expected long-term return in the form of income and capital gains respectively from the Company’s investment portfolio.
4. Other expenses
Accounting Policy
All expenses are accounted for on an accruals basis. The transaction costs incurred when purchasing or selling assets are written off to the Income Statement in the period that they occur.
Disclosure
| 28 February | 28 February | |
| 2022 | 2021 | |
| £’000 | £’000 | |
| IFA charges | 290 | 259 |
| Directors’ remuneration | 102 | 107 |
| Registrars’ fees | 55 | 61 |
| Audit fees | 36 | 36 |
| Printage and postage | 18 | 24 |
| VCT monitoring fees | 21 | 20 |
| Broker’s fees | 6 | 7 |
| Other administration expenses | 228 | 180 |
| 775 | 707 |
The fees payable to the Company’s auditor are stated net of VAT and the VAT is included within other administration expenses.
The ongoing charges of the Company were 1.9% of average net assets during the year to 28 February 2022 (2021: 1.7%). Ongoing charges are calculated using the AIC methodology and exclude exceptional costs and trail commission.
5. Tax
Accounting Policy
Corporation tax payable is applied to profits chargeable to corporation tax, if any, at the current 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.
The corporation tax charge for the year was £nil (2021: £nil).
Disclosure
| 28 February | 28 February | |
| 2022 | 2021 | |
| Tax reconcilation | £’000 | £’000 |
| (Loss)/profit before tax | (19,459) | 50,850 |
| Current tax at 19.0% (2021:19.0%) | (3,697) | 9,661 |
| Effects of | 61 | |
| Non-taxable income | (161) | 36 |
| Non-taxbale capital gains | 3,138 | 24 |
| Non deductible expenses | (3) | 20 |
| Excess management expenses on which deferred tax not recognised | 723 | 7 |
| Total tax charge | - | - |
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 deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
As at 28 February 2022 there is an unrecognised deferred tax asset of £5,758,000 (2021: £3,653,000) in respect of accumulated surplus management expenses of £23,030,000 (2021: £16,649,000), based on a prospective corporation tax rate of 25% (2021: 19%). This deferred tax asset could in future be used against taxable profits.
Provided the Company continues to maintain its current investment profile, it is unlikely that the expenses will be utilised and that the company will obtain any benefit from this asset.
6. Dividends
A Accounting Policy
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 on the record date, the date on which those shareholders on the share register are entitled to the dividend.
Disclosure
| 28 February | 28 February | |
| 2022 | 2021 | |
| £’000 | £’000 | |
| Dividends paid on ordinary shares | ||
| Final dividend – 3.5p per share paid 13 August 2021 (2021: 2.5p per share) | 5,035 | 3,967 |
| Special dividend – 2.5p per share paid 13 August 2021 (2021: 3.0p per share) | 3,597 | - |
| Interim dividend – 2.5p per share paid 14 January 2022 (2021: 2.5p per share) | 4,031 | 3,668 |
| 12,663 | 7,635 | |
| During the year £2,342,000 (2021: £1,417,000) of dividends were reinvested under the DRIS. | ||
| 31 January | 31 January | |
| 2022 | 2021 | |
| £’000 | £’000 | |
| Dividends paid and proposed in respect of the year – Ordinary shares | ||
| Interim dividend – 2.5p per share paid 15 January 2021 (2021: 2.5p per share) | 4,031 | 3,668 |
| Final dividend proposed – 3.0p per share payable 12 August 2022 (2021: 3.5p) | 4,795 | 5,044 |
| Special dividend– Nil (2021: 2.5p per share) | - | 3,603 |
| 8,826 | 12,335 | |
| Under Section 32 of FRS 102 ‘Events After Balance Sheet Date’, dividends payable at year end are not recognised as a liability in the Financial Statements. The above proposed final dividend is based on the number of shares in issue at the date of this report. The actual dividend paid may differ from this number as the dividend payable will be based on the number of shares in issue on the record date and will reflect any changes in the share capital between the year end and the record date. | ||
7. Earnings per share
| 28 February 2022 | 28 February 2021 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| (Loss)/profit attributable to ordinary shareholders (£’000) | (780) | (18,679) | (19,459) | (722) | 51,572 | 50.850 |
| Earnings per ordinary share (p) | (0.5)p | (12.4)p | (12.9)p | (0.5)p | 37.9p | 37.4p |
The earnings per share is based on 151,132,679 (2021: 136,141,642) shares, being the weighted average number of shares in issue during the year, and the loss on ordinary activities after tax for the year of £19,459,000 (2021: profit £50,850,000)
There are no potentially dilutive capital instruments in issue and, as such, the basic and diluted earnings per share are identical.
8. Net Asset Value per share
| 28 February | 28 February | |
| 2022 | 2021 | |
| Net assets (£) | 168,169 | 182,156 |
| Shares in issue | 160,480,523 | 146,112,119 |
| Net asset value per share (p) | 104.8 | 124.7 |
There are no potentially dilutive capital instruments in issue and, as such, the basic and diluted NAV per share are identical.
9. Related Party Transactions
The Company has employed Octopus throughout the year as Investment Manager. Octopus has also been appointed the custodian of the Company’s investments under a Custodian Agreement.
The Company has paid Octopus £3,061,000 (2021: £1,948,000) in the year as a management fee. The management fee is payable quarterly in arrears and is based on 2.0% of net assets at 6 month intervals.
The Company receives a reduction in the management fee for the investments in other Octopus managed funds, being the Octopus Portfolio Manager, Multi Cap Income Fund, Micro Cap Growth Fund and Future Generations Fund, to ensure the Company is not double charged on these products. This amounted to £100,000 in the year to 28 February 2022 (2021: £78,000).
Octopus received £nil (2021: £nil) transaction fees and directors’ fees from investee companies. The Company holds £246,000 (2021: £162,000) of cash on behalf of the Company and AIM VCT 2 PLC. Of this, £161,000 (2021: £97,000) is attributable to the Company.
10. 2022 financial information
The figures and financial information for the year ended 28 February 2022 are extracted from the Company’s annual financial statements for the period and do not constitute statutory accounts. The Company’s annual financial statements for the year to 28 February 2022 have been audited but have not yet been delivered to the Registrar of Companies. The Auditors’ report on the 2022 annual financial statements was unqualified, did not include a reference to any matter to which the auditors drew attention without qualifying the report, and did not contain any statements under Sections 498(2) or 498(3) of the Companies Act 2006.
11. 2021 financial information
The figures and financial information for the period ended 28 February 2021 are compiled from an extract of the published financial statements for the period and do not constitute statutory accounts. Those financial statements have been delivered to the Registrar of Companies and included the Auditors’ report which was unqualified, did not include a reference to any matter to which the auditors drew attention without qualifying the report, and did not contain any statements under Sections 498(2) or 498(3) of the Companies Act 2006.
12. Annual Report and financial statements
The Annual Report and financial statements will be posted to shareholders in June and will be available on the Company’s website. The Notice of Annual General Meeting is contained within the Annual Report.
13. General information
Registered in England & Wales. Company No. 03477519
LEI: 213800C5JHJUQLAFP619
14. Directors
Neal Ransome (Chair),Stephen Hazell-Smith, Joanne Parfrey and Andrew Boteler
15. Secretary and registered office
Octopus Company Secretarial Services Limited
33 Holborn, London EC1N 2HT
