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ELDERSTREET DRAPER ESPRIT VCT PLCLEI: 2138003I9Q1QPDSQ9Z97FINAL RESULTS FOR THE PERIOD ENDED 31 MARCH 2018

FINANCIAL SUMMARY

	31 Mar2018 pence		31 Dec 2016pence
Net asset value per share (“NAV”)	57.5		62.8
Cumulative dividends paid since launch	99.0		96.0
Total Return (NAV plus cumulative dividends paid per share)	156.5		158.8
Dividends in respect of financial period ended 31 March 2018
Interim dividend paid per share	1.5		2.5
Final dividend per share (payable on 12 October 2018)	1.5		1.5
	3.0		4.0

CHAIRMAN’S STATEMENTI present the Company’s Annual Report for the period ended 31 March 2018. This has been a busy period for the Company in terms of new investment activity, as a number of opportunities arising from the arrangements with Draper Esprit have been backed with the proceeds from the last year’s fundraising. Although most of the larger investments have performed satisfactorily, there have been some setbacks which have impacted performance for the year.

Change of year endAs reported previously, the Company changed its year end from 31 December to 31 March to better fit with the financial calendar of Draper Esprit plc, with whom the Company is now co-investing on most transactions. This report covers the 15-month period to 31 March 2018. The next Half-Year Report will be in respect of the six months ended 30 September 2018.

Net asset value and resultsAs at 31 March 2018, the Company’s Net Asset Value per share (“NAV”) stood at 57.5p, representing a decrease of 2.3p (3.7%) over the period, after adding back dividends paid during the period, of 3.0p per Share.

The Total Return to Shareholders who invested at the launch of the Company in 1998 (NAV plus cumulative dividends) now stands at 156.5p compared to the original cost (net of income tax relief) of 80.0p per share. A summary of the position for Shareholders who invested in the Company’s various other fundraisings is included on page 3 of the Annual Report.

The loss on ordinary activities after taxation for the 15-month period (2016: year) was £1.65 million (2016: £1.0 million), comprising a revenue return of £92,000 (2016: £222,000) and a capital loss of £1.74 million (2016: £1.3 million).

Venture capital investmentsPortfolio activityDuring the period, the Company made five new and two follow-on investments totalling £5.6 million. A small number of realisations also occurred in the period, giving rise to realised gains of £757,000.

Further details on the investment activity can be found in the Investment Manager’s report.

Investment valuations At the period end, the Company held a portfolio of 26 Venture Capital investments valued at £20.8 million. The top ten investments constitute the majority of the overall portfolio value.

The Board has reviewed the investment valuations at the period end date and accordingly some adjustments have been made.

The most significant valuation uplift was in respect of Fords Packaging Topco Limited. The business continues to perform well, and a £2.4 million uplift has been recognised as a result.

Unfortunately, there was a major disappointment in respect of the investment in AngloINFO Limited. The Manager provided intensive support to the company throughout the year, bringing in new management and launching a new website, which it was hoped could unlock the company’s potential. Ultimately, the company has not been able to make sufficient progress and, since the period end, in view of the considerable further funding that would be required in order for the business to meet its immediate operating commitments, the decision was taken not to support the company further and it has now gone into liquidation. A full provision has therefore been made, resulting in an unrealised loss of £2.8 million for the year.

Macranet Limited, which has been historically held at cost, was written down by £778,000 to reflect recent trading results.

Baldwin & Francis Limited has also experienced some further challenges of late, which have led to earnings being below budget. As a result, the valuation of the VCT’s holding has been written down by £491,000.

Ridee Limited, the food delivery business trading under the Jinn brand, in which the VCT invested £500,000, has found competition from the likes of Deliveroo to be extremely aggressive. The investment has now been fully provided against.

Several of the Company’s investments are quoted on AIM, and such investments have also been revalued at the period end date, in order to reflect their quoted prices. The most significant revaluation movement of the AIM investments was a £379,000 uplift to Fulcrum Utility Services Limited.

Overall, the unrealised valuation movements on the portfolio resulted in a net write down for the period, of £1.8 million.

Further commentary on the portfolio, together with a schedule of additions, disposals and details of the ten largest investments, can be found within the Investment Manager’s Report and Review of Investments.

Fixed Interest investmentsThe small portfolio of Fixed Interest investments, managed by Smith & Williamson, was realised during the year. The portfolio generated proceeds of £1.5m, resulting in a profit over cost of £26,000. Under VCT regulations no new fixed interest investments can be made, so the Board took the decision to realise the remaining holdings and refocus this capital.

Fundraising In December 2016 the Company launched a Prospectus Offer for Subscription which raised gross proceeds of £18 million, with issue costs in respect of the offer amounting to £498,000.

The Company launched a further Prospectus Offer during December 2017, which closed on 31 May 2018, having raised a total of £3.9 million.

DividendsThe Board is proposing a final dividend of 1.5p per share, to be paid on 12 October 2018 to Shareholders on the register at 14 September 2018. This will bring the total dividends paid in respect of the period to 3.0p.

The Company has historically paid dividends in June and December each year. The Board expects that dividends will be paid in October and April in future years.

Share buybacksHistorically the Company has operated a policy of buying in shares that become available in the market, at a discount of approximately 7.5% to the latest published NAV. The Board has reviewed this policy, taking into account market factors, and has taken the decision to implement a revised policy. The revised policy will be to buy in shares at a discount of approximately 5% to the latest published NAV, subject to regulatory and liquidity constraints.

Any Shareholders who are considering selling their shares will need to use a stockbroker. Such Shareholders should ask their stockbroker to register their interest in selling their shares with Shore Capital.

During the period the Company purchased a total of 953,914 shares at an average price of 55.9p per share. Resolution 13 will be proposed at the AGM, to renew the authority for the Company to purchase its own shares.

Annual General Meeting (“AGM”)The next AGM of the Company will be held on 18 September 2018 at 20 Garrick Street, London, WC2E 9BT at 11:00 a.m.

Notice of the meeting is at the end of the Annual Report. Four items of Special Business are proposed; one ordinary resolution and three special resolutions in relation to the allotment of shares, share buybacks and the cancellation of Share Premium and the capital redemption reserve.

The Board is seeking authority to issue shares at the AGM, to allow the Company to consider launching a further share offer during the coming year, should market and other conditions be appropriate, without incurring the expense of issuing a Shareholder circular.

The Board is also seeking authority to cancel share premium and the capital redemption reserve, to allow the Company to utilise these reserves for the payment of dividends in future years.

VCT regulations and strategyAs Shareholders will be aware, the UK Government made a number of key changes to VCT regulations in November 2017, as part of the Autumn Budget.

One such change is the requirement to hold 80% (currently 70%) of funds in qualifying holdings, by 1 April 2020. This change has been brought in alongside further measures to refocus VCT investment into young growth companies. Since the arrangements with Draper Esprit have been in place, the Company’s new investment activity has been focused on backing young growing technology businesses. Although investing in this area will increase the risk profile of the portfolio over time, the Board believes that the Company will be able to meet the new 80% threshold before its effective date.

As a result of this gradual shift, the delivery of good returns to Shareholders in the future will depend on major successes from at least a small number of investments, which can offset losses from the inevitable failures which we expect to suffer.

Investment PolicyIn view of the recent changes to the VCT regulations and the co-investment arrangement with Draper Esprit, the Board has taken the decision to review and refine the Company’s Investment Policy. We expect to publish a Shareholder Circular shortly setting out the proposed changes and seeking Shareholder approval to adopt the refined policy.

OutlookThe Board is satisfied with the progress made during the period in investing the Company’s funds. Despite the setbacks in the existing portfolio, most of the Company’s older investments continue to perform satisfactorily and have the potential to provide profitable outcomes in due course.

For many of the Company’s newer investments, it is too early to be confident that they will ultimately be successful, however, at this stage, most are making progress in line with their plans. We expect investment activity to remain at a high level over the next year, as the Manager continues to deploy the Company’s available funds.

I look forward to meeting Shareholders 4 at the AGM and to updating them in the next Half-Year Report to 30 September 2018, which we expect to be published in December.

David BrockChairman

INVESTMENT MANAGER’S REPORTSince the announcement of the co-investment agreement with Draper Esprit to share deal flow, management experience, and investment opportunities going forward, has had a positive start from both the fundraising and investment perspective.

Following this arrangement in late 2016, the VCT has allotted a total of £21.9 million from prospectus fundraisings which has almost doubled funds under management over the period.

During the period under review, £4.1 million of these funds were invested into five new companies and a further £4.9 million were invested or committed into six further investments (‘committed’ means subscription agreements have been signed and completion is pending HMRC advanced assurance).

Over the last 15 months the Company recorded 2.3p decrease in the total return (net asset value including cumulative dividends), from 158.8p to 156.5p. The NAV per share decreased from 62.8p to 57.5p, after paying dividends of 3.0p during the period.

On a positive note, trading has performed better than expected in Fords Packaging Topco Limited (‘Fords’), which repaid £450,000 of its VCT debt earlier than forecasted, and has reported its highest unaudited EBITDA results for ten years. The period end valuation has been increased by £2.4 million to reflect this. We believe that Fords has the potential to provide further growth to the portfolio.

During the year, we continued to support existing portfolio company, AngloINFO Limited, to launch its new website, SmartExpat. Unfortunately, the business has not been able to make sufficient progress and has now gone into liquidation. The consequent write-down of £2.8 million for the period has resulted in a full provision against the £3.5 million investment.

A provision of £0.8 million has been taken against Macranet Limited, and Ridee has been fully provided against, due to the business going into administration.

Two realisations were made in the year. Concorde Solutions was sold for a small return over the VCT’s cost of £1.6 million, and Interquest was sold for a small loss.Within the AIM portfolio, Fulcrum Utility Services Limited and Access Intelligence continue to make upward valuation movements, rising by £0.4 million over the period. As at the date of this report, the valuation of the AIM portfolio had risen by approximately a further £800,000.

New investments, alongside the Draper Esprit group funds, were made into the following companies:

	£ million
IESO a digital platform for healthcare management	1.5
Push Dr a leading online GP consultation platform	0.7
StreetTeam (Verve) a peer to peer affiliate ticketing platform	1.3
Blue Light Optics (Kaptivo) a real-time whiteboard collaboration tool	0.3
AppUx (Droplet) enabling technology to deliver applications on any device	0.3

Further commitments have been made into the following companies, of which Podpoint, Evonetix, IXL Premfina and Endomag had been completed, as at the date of this report:

	£ million
Podpoint installation of electric vehicle charging points	0.86
Push Dr tranche 2 of the investment made above	0.8
Evonetix DNA synthesis and synthetic biology technology	0.8
IXL Premfina insurance broker credit software platform	0.8
Endomag cancer detection technology	0.9
Roomex B2B hotel booking portal	0.75

Together, the investments above total £9.0 million into ten separate companies. These investments are alongside over £80 million of funds from other corporate and venture capitalists. This corroborates the strategy of investing alongside a strong syndicate of investors. In all of these new investments, a member of the Draper Esprit group is a representative on the portfolio company board.

Additionally, there is a pipeline of further deals, and we are confident that the new funds raised over the past two fundraising seasons can be invested within the next 12 months. 

Over the period, additional new VCT qualification rules were introduced by HMRC. We do not currently see any issues around these new rules and the VCT’s refined Investment Policy, as we are investing in knowledge intensive companies which have benefitted from the rule changes.

After the period end, the VCT allotted a further £3.9 million of shares from the prospectus fundraising. The Board is also considering a further fundraising for the current tax year.

In summary, it has been a busy period for the Company, which has seen a significant level of new investment activity. Whilst the new investments offer some exciting prospects for the future, these businesses are still at an early stage and it is too soon to judge whether they will ultimately be successful.

Although there have been some setbacks in several of the older investments, we are cautiously optimistic that the remainder of the legacy portfolio has potential for future growth.

Elderstreet Investments Limited REVIEW OF INVESTMENTS

Portfolio of investmentsThe following investments were held at 31 March 2018. All companies are registered in England and Wales, with the exception of Fulcrum Utility Services Limited which is registered in the Cayman Islands.

	Cost	Valuation	Valuationmovementin period	% ofPortfolioby value
	£’000	£’000	£’000
Ten largest venture capital investments (by value)
Fords Packaging Topco Limited	2,433	5,766	2,421	15.7%
Lyalvale Express Limited	1,915	3,903	-	10.6%
Access Intelligence plc *	2,333	3,011	21	8.2%
Fulcrum Utility Services Limited *	500	2,525	379	6.9%
IESO Digital Health Limited	1,500	1,500	-	4.1%
StreetTeam Software Limited	1,286	1,286	-	3.5%
Push Dr Limited	724	724	-	2.0%
Baldwin & Francis Limited	1,534	422	(491)	1.1%
Cashfac plc	260	394	66	1.1%
AppUx Limited	326	326	-	0.9%
	12,811	19,857	2,396	54.1%
Other venture capital investments
Light Blue Optics Limited	311	311	-	0.8%
Macranet Limited	1,037	259	(778)	0.7%
Servoca plc *	333	228	-	0.6%
Sift Digital Limited	125	48	-	0.1%
Sift Limited	125	42	-	0.1%
Uvenco UK plc*	1,326	36	(36)	0.1%
SparesFinder Limited	104	34	-	0.1%
Kellan Group plc*	657	7	-	-
Proxama plc*	860	6	(116)	-
AngloINFO Limited	3,527	-	(2,819)	-
Ridee Limited	499	-	(350)	-
Lyalvale Property Limited	300	-	(128)	-
Infoserve Group plc	128	-	-	-
The National Solicitors Network Limited	501	-	-	-
The QSS Group Limited	268	-	-	-
RB Sport & Leisure Holdings plc	188	-	-	-
	10,289	971	(4,227)	2.5%
	23,100	20,828	(1,831)	56.6%
Cash at bank and in hand		15,987		43.4%
Total investments		36,815		100.0%

All venture capital investments are unquoted unless otherwise stated

* Quoted on AIM

REVIEW OF INVESTMENTS (continued)

Investment movements for the period ended 31 March 2018ADDITIONS

	£'000
Venture capital investments
IESO Digital Health Limited	1,500
StreetTeam Software Limited	1,286
AngloINFO Limited	1,250
Push Dr Limited	724
AppUx Limited	326
Light Blue Optics Limited	311
Macranet Limited	175
	5,572

DISPOSALS

	Cost	Value at01/01/17	Proceeds	Profitvs cost	Realisedprofit inthe period
	£’000	£’000	£’000	£’000	£’000
Quoted investments
Interquest Group plc *	226	156	172	(53)	16
Fixed income securities
United Kingdom 1.25% Gilt 22/07/2018	892	925	920	28	(5)
United Kingdom 1.00% Gilt 07/09/2017	614	616	613	(2)	(3)
S&W Investment Funds Cash Fund	10	10	10	-	-
Venture Capital Investments
Concorde Solutions Limited	1,650	1,525	1,749	99	224
Fords Packaging Topco Limited	450	450	450	-	-
Retention proceeds
Wessex Advanced Switching Products Limited	-	-	525	525	525
	3,842	3,682	4,439	597	757

* Quoted on AIM

Directors’ responsibilities statement The Directors are responsible for preparing the Report of the Directors, the Strategic Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). 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 of 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 judgments 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; andprepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; andprepare a director’s report, a strategic 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, to disclose with reasonable accuracy at any time the financial position of the Company and to 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.

In addition, each of the Directors considers that the Annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ 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.

By order of the Board

Grant WhitehouseSecretary of Elderstreet Draper Esprit VCT plc

INCOME STATEMENTfor the period ended 31 March 2018

		Period ended 31 March 2018				Year ended 31 December 2016
		Revenue	Capital	Total		Revenue	Capital	Total
		£’000	£’000	£’000		£’000	£’000	£’000
Income		673	-	673		603	-	603
Losses on investments		-	(1,074)	(1,074)		-	(867)	(867)
		673	(1,074)	(401)		603	(867)	(264)
Investment management fees		(198)	(596)	(794)		(125)	(375)	(500)
Performance incentive fees		-	-	-		-	-	-
Other expenses		(383)	(74)	(457)		(256)	(13)	(269)
Return/(loss) on ordinary activities before tax		92	(1,744)	(1,652)		222	(1,255)	(1,033)
Tax on total comprehensive income and ordinary activities		-	-	-		-	-	-
Return/(loss) attributable to equity shareholders, being total comprehensive income for the period		92	(1,744)	(1,652)		222	(1,255)	(1,033)
Basic and diluted return/(loss) per share		0.2p	(3.1p)	(2.9p)		0.6p	(3.6p)	(3.0p)

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards (“FRS 102”). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in February 2018 by the Association of Investment Companies (“AIC SORP”).

STATEMENT OF CHANGES IN EQUITYfor the period ended 31 March 2018

	Sharecapital	CapitalRedemptionreserve	Sharepremium	Mergerreserve	Specialreserve	Capitalreserve- unrealised	Capitalreserve - realised	Revenuereserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the year ended 31 December 2016
At 1 January 2016	1,733	474	3,743	1,828	2,629	4,433	9,132	486	24,458
Total comprehensive income	-	-	-	-	-	(1,312)	57	222	(1,033)
Transfer between reserves	-	-	-	-	(423)	40	383	-	-
Transactions with owners
Issue of new shares	130	-	1,709	-	-	-	-	-	1,839
Share issue costs	-	-	-	-	(9)	-	-	-	(9)
Purchase of own shares	(11)	11	-	-	(139)	-	-	-	(139)
Dividends paid	-	-	-	-	-	-	(1,484)	(372)	(1,856)
At 31 December 2016	1,852	485	5,452	1,828	2,058	3,161	8,088	336	23,260
For the period ended 31 March 2018
At 1 January 2017
Total comprehensive income	-	-	-	-	-	(1,831)	87	92	(1,652)
Transfer between reserves*	-	-	-	-	(572)	4,185	(3,613)	-	-
Transactions with owners
Issue of new shares	1,390	-	16,602	-	-	-	-	-	17,992
Share issue costs	-	-	-	-	(498)	-	-	-	(498)
Purchase of own shares	(48)	48	-	-	(536)	-	-	-	(536)
Dividends paid	-	-	-	-	-	-	(1,231)	(615)	(1,846)
At 31 March 2018	3,194	533	22,054	1,828	452	5,515	3,331	(187)	36,720

* A transfer of £4,185,000 (2016: £40,000), representing impairment losses during the year, as well as cumulative unrealised gains on investments which were disposed of during the period (2016: year), has been made from the Capital reserve - unrealised to the Capital Reserves – realised. A transfer of £572,000 (2016: £423,000), representing realised gains on investment disposals, plus capital expenses and capital dividends in the year, has been made from Capital Reserve – realised to the Special reserve.

BALANCE SHEETat 31 March 2018

				2018			2016
			£’000	£’000		£’000	£’000
Fixed assets
Investments				20,828			20,769
Current assets
Debtors			84			342
Cash at bank and in hand			15,987			2,302
			16,071			2,644
Creditors: amounts falling due within one year			(179)			(153)
Net current assets				15,892			2,491
Net assets				36,720			23,260
Capital and reserves
Called up share capital				3,194			1,852
Capital redemption reserve				533			485
Share premium				22,054			5,452
Merger reserve				1,828			1,828
Special reserve				452			2,058
Capital reserve – unrealised				5,515			3,161
Capital reserve – realised				3,331			8,088
Revenue reserve				(187)			336
Total equity shareholders’ funds				36,720			23,260
Basic and diluted net asset value per share				57.5p			62.8p

STATEMENT OF CASH FLOWS for the period ended 31 March 2018

	2018		2016
	£’000		£’000
Cash flow from operating activities
Loss on ordinary activities before taxation	(1,652)		(1,033)
Losses on investments	1,074		867
Decrease in debtors	258		1,415
Increase/(decrease) in creditors	26		(448)
Net cash (outflow)/inflow from operating activities	(294)		801
Cash flow from investing activities
Purchase of investments	(5,572)		(1,892)
Proceeds from disposal of investments	4,439		445
Net cash outflow from investing activities	(1,133)		(1,447)
Cash flow for financing activities
Equity dividends paid	(1,846)		(1,856)
Proceeds from share issue	17,992		1,839
Share issue costs	(498)		(9)
Purchase of own shares	(536)		(139)
Net cash inflow/(outflow) from financing activities	15,112		(165)
Net increase/(decrease) in cash	13,685		(811)
Cash and cash equivalents at start of period	2,302		3,113
Cash and cash equivalents at end of period	15,987		2,302
Cash and cash equivalents comprise
Cash at bank and in hand	15,987		2,302
Total cash and cash equivalents	15,987		2,302

NOTES TO THE ACCOUNTS for the period ended 31 March 2018

1.Accounting policiesGeneral information

Elderstreet Draper Esprit VCT plc (“the Company”) is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales. The Company is a premium listed entity on the London Stock Exchange.

Basis of accountingThe Company has prepared its financial statements in accordance with the Financial Reporting Standard 102 (“FRS 102”) and in accordance with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” issued in February 2018 (“SORP”).

Presentation of Income StatementIn order to better reflect the activities of a venture capital trust, and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Judgement in applying accounting policies and key sources of estimation uncertaintyInvestmentsInvestments are designated as “fair value through profit or loss” assets, upon acquisition, due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed, with a view to selling after a period of time, in accordance with the Company’s documented Investment Policy.

Of the Company’s assets measured at fair value, it is possible to determine their fair values within a reasonable range of estimates. The fair value of an investment upon acquisition is deemed to be cost. Thereafter, investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) together with FRS 102 sections 11 and 12.

Listed fixed income investments and investments quoted on AIM and the Main Market are measured using bid prices in accordance with the IPEV.

For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

-Price of recent investment;-Multiples;-Net assets;-Discounted cash flows or earnings (of underlying business);-Discounted cash flows (from the investment); and-Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value as explained in the investment accounting policy above and addressed further in note 9.

Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. Permanent impairments in the value of investments are deemed to be realised losses and held within the Capital Reserve – Realised.

Gains and losses arising from changes in fair value are included in the Income Statement for the period as a capital item and transaction costs on acquisition or disposal of the investment expensed.

It is not the Company’s policy to exercise significant influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS102 sections 14 and 15 that do not require portfolio investments to be accounted for using the equity method of accounting.

Income Dividend income from investments is recognised when the Shareholders’ rights to receive payment have been established, normally the ex-dividend date.

Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

ExpensesAll expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

-Expenses which are incidental to the acquisition of an investment are deducted as a capital item.

-Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

-Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment manager’s fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board’s expectation of long term returns from the Company’s investments in the form of capital gains and income respectively.

-Performance incentive fees arising are treated as a capital item.

TaxationThe tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company’s effective rate of tax for the accounting period.

Due to the Company’s status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company’s investments which arise.

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors and other creditorsOther debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costsIssue costs in relation to the shares issued are deducted from the special reserve.

DividendsDividends payable are recognised as distributions in the financial statements when the company’s liability to make payment has been established.

Cash and cash equivalentsCash and cash equivalents include cash in hand and deposits held at call with banks with an original maturity of three months or less.

2.Basic and diluted return per share

	2018		2016
Return per share based on:
Net revenue return for the financial period (£’000)	92		222
Net capital gains/(losses) for the financial period (£’000)	(1,744)		(1,255)
Total Return for the financial period (£’000)	(1,652)		(1,033)
Weighted average number of shares in issue	57,026,412		35,214,342

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share. The return per share disclosed, therefore, represents both basic and diluted return per share.

3.Basic and diluted net asset value per share

			31 March 2018				31 December 2016
Shares in issue			Net asset value				Net asset value
2018		2016		Penceper share		£’000		Penceper share		£’000
Ordinary Shares	63,884,554	37,034,366		57.5		36,720		62.8		23,260

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per share. The net asset value per share disclosed therefore represents both basic and diluted net asset value per share.

4.Principal risksThe Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:

-Market risks;-Credit risk; and-Liquidity risk.

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the period and there have also been no significant changes to the policies for managing those risks during the period.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the period end are provided below.

Market risksAs a VCT, the Company is exposed to investment risks in the form of potential losses that may arise on the investments it holds in accordance with its Investment Policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:-Investment price risk; and-Interest rate risk.

The Company has undertaken sensitivity analysis on its financial instruments, split into the relevant component parts, taking into consideration the economic climate at the time of review in order to ascertain the appropriate risk allocation.

Investment price riskInvestment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company’s investment objectives. It represents the potential loss that the Company might suffer through investment price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.

Interest rate riskThe Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers and on liquidity funds at rates based on the underlying investments. Investments in loan notes and fixed interest investments attract interest predominately at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.

Interest rate risk profile of financial assets and financial liabilitiesThere are three levels of interest which are attributable to the financial instruments as follows:

-“Fixed rate” assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.-“Floating rate” assets predominantly bear interest at rates linked to Bank of England base rate and comprise cash at bank and Cash Trust investments.-“No interest rate” assets do not attract interest and comprise equity investments, loans and receivables (excluding cash at The Company monitors the level of income received from fixed, floating and non-interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

The Bank of England base rate increased from 0.25% per annum to 0.5% per annum on 2 November 2017. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and Total Return of the Company.

Credit riskCredit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan notes in investee companies, investments in fixed income securities, cash deposits and debtors.

The Manager manages credit risk in respect of loan notes with a similar approach as described under market risks above. In addition, the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company’s business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Bank of Scotland plc, with a balance also maintained at Royal Bank of Scotland plc, both of which are A-rated financial institutions and ultimately part-owned by the UK Government. Consequently, the Directors consider that the risk profile associated with cash deposits is low.

There have been no changes in fair value during the period that can be directly attributable to changes in credit risk.

Liquidity riskLiquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company normally has a relatively low level of creditors (31 March 2018: £179,000, 31 December 2016: £153,000) and has no borrowings. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company’s exposure to liquidity risk is minimal.

The Company’s liquidity risk is managed by the Investment Manager, in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

Related party transactionsMichael Jackson is a Director of Elderstreet Investments Limited which provides investment management services to the Company. During the 15-month period (2016: year), £794,000 (2016: £500,000) was due in respect of these services. No performance incentive fees were due to Elderstreet Investments Limited in respect of the period under review (year ended 31 December 2016: £nil).

Nicholas Lewis is a partner of Downing LLP, which provides administration services to the Company. During the 15-month period (2016: year), £62,500 (2016: £50,000) was due to Downing LLP in respect of these services.

During 2015, as a result of changes to the VCT rules, the Company was unable to convert its existing loans in Uvenco UK plc (formerly SnackTime plc). Following advice from specialist VCT advisors, the Company sold the loans to the Investment Manager, who converted the loans into equity. Under the terms of the transaction, the Company is due sums equal to 75% of any disposal proceeds that the Investment manager may receive on the shares. The market value of those shares decreased by £99,264 and accordingly the debtor due from the Investment Manager was reduced by £74,448, being 75% of the value adjustment, to £74,447.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTSThe financial information set out in this announcement does not constitute the Company’s statutory financial statements in accordance with section 434 Companies Act 2006 for the period ended 31 March 2018, but has been extracted from the statutory financial statements for the period ended 31 March 2018, which were approved by the Board of Directors on 30 July 2018 and will be delivered to the Registrar of Companies following the Company’s Annual General Meeting. The Independent Auditor’s Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the period ended 31 March 2018 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD, and will be available for download from www.downing.co.uk.