Annual Financial Report for the Year Ended 31 March 2023

15 June 2023

NORTHERN 3 VCT PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2023

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

Financial highlights (comparative figures as at 31 March 2022):

*Excluding proposed final dividend payable on 18 August 2023.

Enquiries:

James Sly / Sarah Williams, Mercia Asset Management PLC – 0330 223 1430

Website: www.mercia.co.uk/vcts/n3vct/

CHAIRMAN’S STATEMENT  

Results and dividend

The net asset value (NAV) per share at 31 March 2023 was 91.6 pence compared with 97.9 pence as at 31 March 2022. The total return per share for the year as shown in the income statement was minus 1.6 pence (2022: minus 0.1 pence).

Last year we increased the target annual dividend yield to 4.5% of opening NAV per share. Having already declared an interim dividend of 2.0 pence per share which was paid in January 2023, your Directors now propose a final dividend of 2.5 pence. These payments totalling 4.5 pence (2022: 5.0 pence) are equivalent to 4.6% of the opening NAV. The proposed final dividend will, subject to approval by shareholders at the Annual General Meeting, be paid on 18 August 2023.

Sales in the venture portfolio realised £15.4 million on an initial cost of £6.7 million, producing a gain of £8.7 million. There was a decrease in the valuation of the Company’s listed venture holdings of £1.2 million. The volatility in the listed portfolio was primarily caused by a fall in the musicMagpie PLC share price.

Our dividend investment scheme, under which dividends can be re-invested in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate. Instructions on how to join the scheme are included within the dividend section of our website, which can be found here: mercia.co.uk/vcts/n3vct/.

Investment portfolio

The realisation of the older investments made under the ‘pre-2015’ rules continues and constituted 22% of the Company’s investments as at 31 March 2023. We expect this to provide a number of profitable future sales. Overall, it was a busy year, with a number of notable transactions either completed or in progress at our year end. The highlights during the year were the sales of Lineup Systems and Ideagen plc which provided returns of 7.8 times and 9.7 times cost respectively over the course of the investment.

Despite some reductions in the Directors’ valuations of the unquoted investments, particularly in consumer businesses, gains in Evotix (realised shortly after our year-end) and strong performances by several other portfolio companies resulted in an unchanged valuation.

New investments have exceeded the previous year’s level, with £10.3 million provided to nine new venture capital investments and £5.9 million of follow on capital invested into existing investments.

Share offers and liquidity

Liquidity increased as a result of the £17.0 million share offer in April 2022 and, as a result of the public share offer launched in January 2023, 6,597,040 new ordinary shares were issued in April 2023 for gross proceeds of £6.0 million. Following this offer in 2022/23, and taking into account the increased rate of investment, the Board is pleased to announce that the Company will produce a prospectus for an offer in the 2023/24 tax year of £14.0 million, with an over-allotment facility of £6.0 million. This offer will be launched in September 2023.

We have maintained our policy of buying back our shares in the market, where necessary to maintain market liquidity. During the year 3,383,207 shares, equivalent to approximately 3.1% of the opening share capital, were purchased for cancellation.

Changes to the performance-related management fee

Following a review of current arrangements by the Board, a resolution proposing changes to the Management Agreement in relation to the performance-related management fee is included in the circular for the General Meeting. If approved, these changes will be implemented by a deed of variation to the Company’s existing Management Agreement.

The changes in VCT legislation in 2015 required the Company to focus new investment on earlier stage companies which, by their nature, are higher risk and therefore likely to deliver more volatile investment returns. Consequently, an adjustment is proposed to the scheme to ensure that strong returns above a hurdle are delivered consistently, not just in a single year, with a requirement that any decline in shareholder NAV must be made good, before a performance fee is payable to the Manager. As part of these changes, the Board and the Manager have agreed that at least 80% of any performance fee generated is paid to the VCT investment team. Full details of the changes are set out in the accompanying circular.

Responsible Investment

The Company’s approach to Environmental, Social and Governance (ESG) responsibilities is set out in the annual report.

Geopolitical and other macroeconomic risks

The Company’s investments may be affected by regional events or politics. A recent example of this is the high-inflation environment in the aftermath of COVID-19 and the conflict in Ukraine. The Board has no control over such macro events, and as the Company’s investments are domiciled in the UK with only a limited presence in the rest of the world, risks are somewhat localised to those facing the UK economy. As a result of the conflict in Ukraine, in the year the Manager undertook a review of the entire portfolio for links to sanctioned individuals and companies, took appropriate action where required, and continues to monitor the situation carefully.

VCT legislation and qualifying status

The Company has continued to meet the stringent and complex qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Mercia monitors the position closely and reports regularly to the Board.

The ‘sunset clause’ was a European state aid requirement when the VCT scheme received state aid approval, which means that without a change in legislation, investors will not receive upfront tax relief when investing in VCTs from 6 April 2025. While the government has signalled that it will extend the scheme, no formal legislation has been introduced to enact this commitment. The Company and the Manager will continue to monitor progress in this area. The Board considers that the Company, and VCTs more generally, are successfully delivering against the Government’s mandate, which is to channel money into higher-risk, early-stage businesses.

Annual General Meeting

The Company’s Annual General Meeting (AGM) will take place on 27 July 2023. We intend to hold the 2023 AGM in person at Reed Smith LLP, Broadgate Tower, 20 Primrose Street, London, EC2A 2RS. Following positive comments received from the last meetings, we also intend to offer remote access for shareholders through an online webinar facility. Full details and formal notice of the AGM will be provided separately. The General Meeting regarding the proposed changes to the performance-related management fee will be held immediately after the AGM.

Outlook

Access to capital is one of the most important factors contributing to the success of early stage businesses; we believe that the Company is well placed to provide that. We are encouraged by the investment opportunities that we are seeing despite the various economic concerns.

James Ferguson

Chairman

15 June 2023

Extracts from the audited financial statements for the year ended 31 March 2023 are set out below.

INCOME STATEMENT

BALANCE SHEET

STATEMENT OF CHANGES IN EQUITY

CASH FLOW STATEMENT

INVESTMENT PORTFOLIO

* Quoted on AIM

**This percentage change in ‘like for like’ valuations is a comparison of the 31 March 2023 valuations with the 31 March 2022 valuations (or where a new investment has been made in the year, the investment amount), having adjusted for any partial disposals, loan stock repayments or new and follow-on investments in the year.

RISK MANAGEMENT

The Board carries out a regular and robust assessment of the risk environment in which the Company operates and seeks to identify new risks as they emerge. The principal and emerging risks and uncertainties identified by the Board which might affect the Company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows:

Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the Company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals. The securities of smaller companies in which the Company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities. The Company may invest in businesses whose shares are quoted on AIM – the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide. Mitigation: the Directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector, within the rules of the VCT scheme. The Board reviews the investment portfolio with the Manager on a regular basis.

Financial risk: most of the Company’s investments involve a medium to long-term commitment and many are relatively illiquid. Mitigation: the Directors consider that it is inappropriate to finance the Company’s activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the Company’s assets in cash or cash equivalents in order to be in a position to pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies. The Company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk: events such as economic recession or general fluctuation in stock markets, exchange rates and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the Company’s own share price and discount to net asset value. The level of economic risk has been elevated recently by inflationary pressures, interest rate increases, and supply shortages Mitigation: the Company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where it is appropriate and in the interests of the Company to do so. The Manager typically provides an investment executive to actively support the board of each unquoted investee company. At all times, and particularly during periods of heightened economic uncertainty, the investment executives share best practice from across the portfolio with investee management teams in order to mitigate economic risk.

Stock market risk: some of the Company’s investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as the conflict in Ukraine, terrorist activity or global health crises can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the Company’s quoted investments are actively managed by specialist managers, including Mercia in the case of the AIM-quoted investments, and the Board keeps the portfolio and the actions taken under ongoing review.

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

Legislative and regulatory risk: in order to maintain its approval as a VCT, the Company is required to comply with current VCT legislation in the UK. Changes to the UK legislation in the future could have an adverse effect on the Company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval. Mitigation: the Board and the Manager monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.

Internal control risk: the Company’s assets could be at risk in the absence of an appropriate internal control regime which is able to operate effectively even during times of disruption. Mitigation: the Board regularly reviews the system of internal controls, both financial and non-financial, operated by the Company and the Manager. These include controls designed to ensure that the Company’s assets are safeguarded and that proper accounting records are maintained.

VCT qualifying status risk: while it is the intention of the Directors that the Company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained. A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the Company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the Company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment. Mitigation: the investment manager keeps the Company’s VCT qualifying status under continual review and its reports are reviewed by the Board on a quarterly basis. The Board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.

DIRECTORS’ RESPONSIBILITIES STATEMENT

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, 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 its profit or loss for the year.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and 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;
• assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and corporate governance statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors have confirmed that to the best of our knowledge:

•     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

•     the Strategic Report and Directors’ Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

The Directors consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

The Directors of the company at the date of this announcement were Mr J G D Ferguson (Chairman), Mrs A B Brown, Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

OTHER MATTERS

The financial information set out above does not constitute the company’s statutory accounts for the years ended 31 March 2023 or 2022 but is derived from those accounts. Statutory accounts for 2022 have been delivered to the registrar of companies, and those for 2023 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The calculation of the return per share is based on the loss after tax for the year of £1,967,000 (2022: £119,0000) and on 124,886,897 (2022: 109,817,073) shares, being the weighted average number of shares in issue during the year

The calculation of net asset value per share as at 31 March 2023 is based on net assets of £112,993,000 (2022: £106,860,000) divided by the 123,319,779 (2022: 109,115,361) ordinary shares in issue at that date.

If approved by shareholders, the proposed final dividend of 2.5 pence per share for the year ended 31 March 2023 will be paid on 18 August 2023 to shareholders on the register at the close of business on 21 July 2023.

The full annual report including financial statements for the year ended 31 March 2023 is expected to be made available to shareholders on or around 26 June 2023 and will be available to the public at the registered office of the company at Forward House, 17 High Street, Henley-in-Arden B95 5AA and on the company’s website.

Neither the contents of the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the Mercia Asset Management PLC website (or any other website), are incorporated into, or form part of, this announcement.