Hygea VCT plc : Annual Report and Accounts and Notice of AGM

For immediate release                                                                                                  10 April 2017

Hygea VCT plc ("the Company" or "Hygea")

Annual Report and Accounts for the year ended 31 December 2016

and

Notice of General Meeting

The Directors are pleased to announce the audited results of the Company for the year ended 31 December 2016 and a copy of the Annual Report and Accounts will be made available to shareholders shortly.  Set out below are extracts of the audited Report and Accounts.

In addition, the Notice of Annual General Meeting ("AGM") is attached at the end of the Report and Accounts, and is set out below. The AGM will be held at the offices of Octopus Investments, 33 Holborn, London EC1N 2HT on Friday 19 May 2016, at 12.00 noon.

A copy of both documents will be available from the registered office of the Company at 39 Alma Road, St Albans AL1 3AT, as well as on the Company's website: www.hygeavct.com

Financial Summary

	Year to 31 December 2016	Year to 31 December 2015
Net assets (£'000s)	5,547	6,129
Return on ordinary activities after tax (£'000s)	(582)	(1,205)
Earnings per share	(7.2p)	(14.9p)
Net asset value per share	68.3p	75.5p
Dividends paid since inception	24.25p	24.25p
Total return (NAV plus cumulative dividends paid)	92.55p	99.75p

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

Chairman's Statement

I am pleased to present the 2016 Annual Report to shareholders.

Overview
2016 has seen no respite in the problems faced by emerging Life Science companies which I reported last year and, whilst the events of the last year have affected the markets less than expected, this has not translated into any increase in institutional investors' appetite for shares in smaller quoted companies in our sector. Therefore I regret that the reduction in the bid price of Scancell plc from 21.5p to 14.5p during the year (5.25p of which has already been reported in arriving at the Net Asset Value ('NAV') at 30 June 2016) is largely responsible for the reduction in the Company's NAV at 31 December 2016 to 68.3p (31 December 2015: 75.5p). Happily though, our largest unquoted holding (Hallmarq Veterinary Imaging Limited) has continued to perform strongly and we have been able to recognise this in a significant increase in value to partially offset the reduction in the value of our Scancell holding.

We keep our position as regards Scancell plc continually under review and, whilst there are a range of opinions amongst our shareholders, we believe that, for the reasons stated below, on balance, we should not seek to reduce our holding at the current price or time.

Despite this disappointing overall result, your Board sees several signs of optimism within the portfolio and these are referred to later in my report and in the Investment Review.

Results and Dividend
During the year our revenue return on ordinary activities saw a loss of 1.6p per share, a 16% reduction on 2015's loss of 1.9p. This is welcome news and follows our cost reduction programme where operating costs reduced by £25,000 (or 16%), and, notwithstanding the reduction in NAV, the total expense ratio reduced from 2.5% to 2.3%.
The capital return per share amounted to a loss of 5.6p compared to a loss of 13.0p in 2015, primarily due to the reduction in the bid price of Scancell plc but offset by the increase in the value of Hallmarq Veterinary Imaging Limited as referred to earlier.

During the year we made small additions to our holdings in Arecor Limited and Exosect Limited to support their fundraisings. In order to fund these investments and provide for working capital, we have realised 697,688 shares in EKF Diagnostics plc, 137,900 shares in Omega Diagnostics plc and our total holding in Reneuron plc.

As previously reported, Hygea has a policy of accruing the Board's performance fee and, due to the reduction in Net Asset Value, this accrual has reduced during the year by £146,000, thus reducing the loss for the year. The accrual was £255,000 at 31 December 2016.

Overall, the total return for the year amounted to a loss of 7.2p per share compared to a loss of 14.9p per share in 2015.

Our overdraft facility has remained at £200,000 throughout the year and has been renewed. The Board continue to utilise most of this but do not consider it prudent to seek to increase the limit, even though interest rates remain low. We have investigated the possibility of raising some working capital through other means but have decided that the associated costs prohibited this course of action at this time.

As I reported last year, the Board's current policy with regard to dividends will be to return funds to shareholders as soon as practical following any significant realisation, once the outstanding overdraft has been repaid. Sadly I do not see that this will be possible in the coming year given the political uncertainties, which will affect both the stock market and appetite for M&A transactions. However I would point out that previous realisations have rarely been seen more than three months ahead.

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

Scancell plc has announced very positive test results and are reported to be "very optimistic" about the US study after "compelling" melanoma trial results. We also remain optimistic that this investment will deliver results well in excess of our current valuation. Given that this is one of our major investments, shareholders may like to view an interview with Scancell's CEO, Dr Richard Goodfellow, at
http://www.proactiveinvestors.co.uk/companies/stocktube/6674/scancell-very-optimistic-about-us-study-after-compelling-melanoma-trial-results-6674.html

As mentioned already, we have increased the valuation of our investment in Hallmarq Veterinary Imaging Limited by £624,000 and also made modest increases in the valuations of Arecor Limited and Insense Limited following their recent fundraisings. Exosect Limited has progressed well and we have taken the opportunity to release part of the provision we made last year. 

However, on a more challenging note, both Fuel 3D Limited and Glide Pharmaceutical Technologies Limited have found that raising the extra capital to progress their science has been extremely difficult and our valuations now reflect this. We have written down the value of Fuel 3D to the price of the latest fundraising. Despite Glide producing excellent clinical results from its trials during 2016, their board found the raising of further funds challenging and we have therefore taken a further significant provision to reflect the penal terms that were finally agreed with their chosen investor. 

Annual General Meeting
The Company's AGM will be held at 12.00 noon on Friday 19 May 2017 at the Offices of Octopus Investments, 33 Holborn, London E1N 2HT and we look forward to welcoming you to the meeting.

VCT Qualifying Status
We have appointed Philip Hare & Associates to provide the Board with advice on the ongoing compliance with HMRC rules and regulations concerning VCTs. The Board remains confident that we comply with all the required VCT rules and regulations.

Fund Administration
As a continuation of our objective to seek to reduce the cost of administration, and in conjunction with Octopus Investments, we have agreed that our administration will now be performed by Pennywise Accounting Limited with effect from 1 April 2017. We are very grateful to Octopus for all their help and advice since the Company was formed in 2001. As shareholders will know, our Registrars are now Neville Registrars Limited. In addition, Annual Reports, notices of meetings and other documents are published on our website at www.hygeavct.com. We are grateful to those shareholders who have elected for e-communications and, in the spirit of reducing paper, we would urge other shareholders to elect for this method of communication by contacting the Registrars.

Future Prospects
The Chairman's Statement has previously highlighted the shortcomings of the UK capital markets in relation to complex activities, including Life Sciences where, quite rightly, the processes which have to be gone through before a technology can be used on patients are very demanding, calling for considerable patience on the part of investors. There has been a dearth of long term capital in the UK to enable early stage investors in UK businesses to exit and recycle their capital. However, there are some signs that such capital in the UK is beginning to emerge, which should form an escalator of capital for Life Science companies. Importantly, the potential investing organisations contain people with in-depth knowledge of the science - the shortage of such knowledge within the UK capital markets has, in our view, been one of the big impediments to a company such as Scancell accessing funding from major UK institutional investors.

Your Board is disappointed that it has not been able, to date, to return more capital to shareholders. We continue to consider a range of options including the opportunity to increase the size of the Company or even winding it up but have, to date, decided that no alternative option would be in the best interests of shareholders for the following reasons in combination:

1. the capital market developments referred to above should assist the development of the portfolio;
2. we believe that, subject to access to the necessary capital, the portfolio has significant upside potential;
3. if we distribute the portfolio in specie, shareholders may be exposed to capital gains tax should this upside potential be realised, which would be avoided if the investments continue to be held through Hygea. A number of shareholders also have rolled over capital gains liabilities from their initial subscription, which would be realised should a distribution in specie be implemented, with potentially adverse consequences for affected shareholders; and
4. the portfolio is beginning to develop as a structured portfolio with profitable companies (e,g, Hallmarq and Omega Diagnostics) and development stage companies (e.g. Scancell), both with significant upside potential but the latter involving greater risks.

We consider that this makes Hygea attractive to new investors looking for a portfolio with significant potential for capital appreciation whilst enjoying the tax benefits associated with VCT shares. We would hope this will appeal to new investors to provide an outlet for the shares of any shareholders wishing to exit.

We consider that, for all these reasons, the Company remains a desirable investment and explains why we continue to be optimistic about the future of Hygea.

John Hustler
Chairman
7 April 2017

Investment Review

Investment Portfolio

Unquoted Investments	Equity Held (%)	Investment at cost (£'000)	Unrealised profit/(loss) (£'000)	Carrying value at 31 December 2016 (£'000)	Movement in the year to 31 December 2016 (£'000)
Hallmarq Veterinary Imaging Limited	10.2	1,116	913	2,029	624
OR Productivity plc	11.1	765	(101)	664	-
Fuel 3D Technologies Limited	<1.0	299	(23)	276	(169)
Arecor Limited	2.1	141	45	186	28
ImmunoBiology Limited	2.5	868	(742)	126	-
Insense Limited	8.1	509	(388)	121	33
Exosect Limited	1.3	270	(150)	120	38
Microarray Limited	2.9	132	(65)	67	-
Glide Pharmaceutical Technologies Limited	1.2	326	(314)	12	(307)
Axon Limited	13.7	374	(374)	-	-
Total unquoted investments		4,800	(1,199)	3601	247
Quoted Investments	Shares Held	Investment at cost (£'000)	Unrealised profit/(loss) (£'000)	Carrying value at 31 December 2016 (£'000)	Movement in the year to 31 December 2016 (£'000)
Scancell plc	13,249,730	801	1,120	1,921	(927)
Omega Diagnostics plc	2,293,868	328	73	401	46
EKF Diagnostics plc	587,864	119	(23)	96	31
Genedrive plc (previously EpiStem Holdings plc)	34,300	43	(24)	19	(21)
Total quoted investments		1,291	1,146	2,437	(871)
Total investments		6,091	(53)	6,038	(624)

Ten largest holdings (by value)

1. Hallmarq Veterinary Imaging Limited

               

Initial investment date:	31 August 2005	Hallmarq specialises in developing low cost magnetic resonance (MRI) imaging systems for the vet market. The first application was for equine vets to enable the diagnosis of causes of lameness in horses that are not identifiable by any other method - this was the first MRI scanner in the world for standing horses. The business model relies principally on a share of scan fees (i.e recurring income) rather than systems sales. The next development project is an MRI scanner for companion animals, PetVet, a market which is significantly larger than the equine market - the first PetVet was installed in Q4 2014.
Cost:	£1,116,000
Valuation:	£2,029,000
Equity held:	10.2%
Last audited accounts:	31 August 2016
Turnover:	£6.4 million
Profit before tax:	£1.3 million
Net assets:	£8.9 million
Valuation method:	Earnings multiple

Update since 2015: The unaudited results to August 2016 showed sales of £6.4 million (2015 £5.4 million), EBITDA of £2.5 million (2015: £2.0 million) and pre-tax profit of £1.3 million (2015: £1.0 million), with recurring income growing from £4.3 million to £5.2 million. Key events include:

1. the first PetVet in the US (the third installation overall) has been completed - this is expected to make selling in the US (the largest market for PetVet) easier because US vets will no longer have to come to the UK to see a working system;
2. a framework supply agreement for PetVet was signed with VCA (North America's largest network with >600 small animal veterinary hospitals) - in January 2017, it was announced that VCA is being acquired by Mars Inc. for c.$7.7 billion; and
3. agreement was reached for Hallmarq to introduce Toshiba's CT scanning to UK vets. Working with more than one imaging modality increases the likelihood of generating sales from a given input of selling resource.
    
4. Scancell plc

               

Initial investment date:	December 2003	Scancell is an AIM listed biotechnology company that is developing a pipeline of therapeutic vaccines to target various types of cancer, with the first target being melanoma. The Immunobody platform technology, in effect, educates the immune system how to respond - this means that the technology can also be licensed to pharmaceutical companies to assist the development of their own therapeutic vaccines, which is an area of emerging importance for which a number of big pharmas do not have in-house technology. In August 2012 a second platform technology, Moditope, was announced. The first product in clinical trials is SCIB1 - there are early indications that it may have an important role to play as first line treatment (adjuvant) in melanoma patients who no longer have measurable disease (following surgery) and are often generally quite well, but are at a high risk of recurrence and with very few, if any, effective treatment options - there are c. 360,000 such patients in the US alone, of whom c.45% are suitable for SCIB1 treatment.
Cost:	£801,000
Valuation:	£1,921,000
Equity held:	5.1%
Last audited accounts:	30 April 2016
Turnover:	£nil
Loss before tax:	£3.0 million
Net assets:	£10.0 million
Valuation method:	Bid price of 14.5p per  share

In 2015, Scancell started to increase its US orientation in order to access the US infrastructure (clinicians, patient support organisations, pharma companies, capital markets etc) available for supporting Life Sciences companies - this has included the appointment as chairman of John Chiplin, a seasoned biotech CEO who is based in San Diego.

Update since 2015: Scancell's activity now comprises two cancer vaccine platforms from which have been developed three products for use in five cancer indications. An encouraging third party event has been the acquisition in 2016 by Bristol-Myers Squibb of Padlock Therapeutics Inc for upfront and near term contingent milestone payments of up to $225 million and additional contingent consideration of up to $375 million - Padlock is pursuing a similar scientific approach in relation to rheumatoid arthritis as Scancell is pursuing with Moditope for cancer. Until fairly recently, there has been a somewhat negative attitude within the pharma industry to vaccine based approaches to immunotherapy due to past failures. However with developments such as the Padlock acquisition and the support being expressed by key clinicians (see below) it appears that the market is showing renewed interest in cancer vaccines as ideal partners for checkpoint inhibitors. Against this background, key achievements have been:

• in July 2016, Dr Keith Flaherty, Director of the Termeer Center for Targeted Therapy at Massachusetts General Hospital and lead investigator for the trial referred to in the next bullet point, commented 'The SCIB1 overall survival and progression free survival data generated to date go well beyond established norms for this group of melanoma patients. We have a lot of enthusiasm for validating these results in subsequent trials.';
• the Phase II checkpoint inhibitor combination study with SCIB1 (melanoma) is planned to start in H2 2017;
• a Phase I/II clinical trial with SCIB2 (lung cancer) is planned to begin in 2018. The Addario Lung Cancer Medical Institute and the Bonnie J. Addario Lung Cancer Foundation will collaborate on the conduct of the trial;
• first-in-man Modi-1 clinical studies for breast cancer, ovarian cancer and osteosarcoma are anticipated to start in 2018; and

• the January 2017 update re the SCIB1 Phase I/II clinical trial reported that all 16 patients on 2-4mg doses with fully resected disease are still alive, representing a median survival time of 52 months, with 1 patient reaching 5-year post treatment survival time - median observation time since entry in four resected patients who received 8mg is 21 months.

3. OR Productivity plc

Initial investment date:	March 2011	At the end of 2011, Freehand 2010 (a Hygea investee) was acquired by OR Productivity plc (ORP) in exchange for ORP shares. ORP has established the nucleus of a very strong team (led by the former R&D director of Smiths Medical) for commercialising productivity enhancing technologies within the Minimally Invasive Medicine sector. The team is aware of a number of companies within this sector which have good technologies but lack the skills to commercialise their technology efficiently. Freehand 2010 is ORP's first acquisition. Freehand 2010 owns the intellectual property to technology incorporated in a product, FreeHand, for robotically controlling the laparoscope (part of the camera system) used by keyhole surgeons - the camera system is used to put an image of the inside of the patient's body onto a screen, and the surgeon uses this screen when operating to view the procedure. Keyhole surgery is growing in relation to open surgery because the smaller incisions required by the former result in reduced pain and reduced recovery time (hospital stays are very expensive). The business model is free placement of the system and sales of a consumable per operation to generate recurring income - in 2008 there were estimated to be c.3.8 million keyhole operations in Europe and the US, a sector predicted to grow at 9% pa. A key market development is the emergence of HD and 3D for use by keyhole surgeons to provide improved depth of vision. However, viewers of HD and 3D images generally become nauseous if the image is not steady - the Freehand product still appears to be regarded as the leading solution worldwide for enabling HD and 3D camera systems for keyhole surgery to provide a rock steady image.
Cost:	£765,000
Valuation:	£664,000
Equity held:	11.1%
Last audited accounts:	31 March 2016
Turnover:	£201,000
Loss before tax:	£1,343,000
Net assets:	£246,000
Valuation method:	Price of last fundraise

Update since 2015: Against the much publicised challenges being faced by the NHS, selling new disruptive technologies to the NHS is also challenging due to procurement practices being based primarily on price rather than efficiency. However, encouraging developments include a) the publication in October 2016 of Accelerated Access  Review (endorsed by the CEO of the NHS) regarding how the NHS needs to make it easier for SMEs undertaking efficiency enhancing innovation to engage with the NHS and b) senior personnel within two NHS Trusts known to ORP recognising that procurement needs to focus on efficiency rather than just price and that innovation is key to driving efficiency. Key progress has been as follows:

1. FreeHand is being evaluated by the two NHS Trusts referred to above in the context of potentially rolling it out across all of the hospitals within those Trusts - if successful, these two projects alone have the potential to make the UK FreeHand business a profit contributor;
2. new wristed instrument systems are emerging - these need a vision element as part of the total solution, and FreeHand is very well positioned for inclusion in such systems because it is currently available with extensive clinical use, has international regulatory approval together with 'freedom to operate' opinions in place around the world. One new entrant (well-funded) has requested a quote via ORP's US distributor which, if won, would have a first year sales value to ORP of c.£1.5M, and another of the new entrants has also approached ORP; and
3. FreeHand has been engineered in a modular way, making it relatively easy to develop variants to meet specific needs. During 2016, versions have been developed to meet the needs of, for example i) low labour cost markets for which a higher capital cost/lower consumable cost model is more appropriate and ii) gynaecological surgeons; and
4. Two independent studies have been published, one showing the economic benefit of using FreeHand and the other the ease of being trained to use FreeHand, with a third study due for publication in 2017.
    
5. Omega Diagnostics plc

               

Initial investment date:	August 2007	Omega Diagnostics plc ("Omega") listed on AIM via a reverse acquisition in 2006. It is a healthcare diagnostics business providing IVD products for use in hospitals, blood banks, clinics and laboratories in over 100 countries and it specialises in the areas of Food Intolerance, Allergy and Autoimmune Disease, and Infectious Disease. One of its products is Food Detective for home testing of allergies brought about by 59 commonly eaten foods. In December 2010 Allergopharma was acquired by Omega for £7.75 million - it produces manual assays for testing for allergies - part of the strategy for developing the Allergopharma business is to leverage off Omega's distribution reach, and take the assays into the much larger automated market using Omega's Genarrayt platform and the IDS-iSYS platform, which has been licensed from AIM listed Immunodiagnostic Systems Holdings.
Cost:	£328,000
Valuation:	£401,000
Equity held:	2.1%
Last audited accounts:	31 March 2016
Turnover:	£12.7 million
Profit before tax:	£662,000
Net assets:	£20.2 million
Valuation method:	Bid price of 17.5p per share

In June 2012, Omega entered into agreements providing it with worldwide exclusive access to two point-of-care tests, one for CD4 and the other for Syphilis.  Testing for CD4 T- cells is a vital component for the management and care of people suffering from HIV, which affects c.33 million people worldwide - the key competition is currently flow cytometry, which involves laboratories and centralised testing.

In summary, the group currently has two key projects, each of which has transformational growth potential to augment the growth potential of the existing established businesses.

Update since 2015: both of the transformational projects are progressing and the IDS-iSYS project achieved  CE marking for its first panel of 41 allergens in 2016, with a long-term supply contract currently being finalised with  the first customer, which is in Germany - in addition, CE-Marked malaria and pregnancy tests  are due to be available for sale by Q2 2017. The interim results to September 2016 showed sales of £6.8 million (2015: £6.15 million) and adjusted pre-tax profit of £417,000 (2015: £351,000).

5. Fuel 3D Limited

               

Initial investment date:	March 2010	Eykona was founded in 2007 to deploy computer vision technology (essentially 3D imaging) developed within Oxford University for developing a hand held camera to measure the volume of chronic wounds - this is a vital measurement for obtaining an understanding of whether a wound is getting better or worse, and hence assist determining the treatment to be applied. It was recognised from the outset that Eykona's 3D imaging technology has potential applications outside MedTech.
Cost:	£299,000
Valuation:	£276,000
Equity held:	< 1%
Last audited accounts:	30 September 2015
Turnover:	£1,7 million
Loss before tax:	£4.5 million
Net assets:	£2 million
Valuation method:	Price of last fundraise

In 2013, it was learned that certain clinicians in the US were using the camera for making masks for assisting the recovery of patients with facial burns. As a result of this, Eykona became aware of the opportunity within the 3D printing market to develop its camera as the world's first high resolution 3D scanner for the consumer market. The opportunity was validated by launching the prototype on the crowd funding site, Kickstarter, with a 30-day sales target of 75 scanners being set to validate the $1,000 price point - this target was achieved within two days and the campaign closed at 430% of the initial target. In 2014, a new company, Fuel3D Limited, raised £1.6 million in cash (with Hygea subscribing £49,000) and also acquired Eykona's IP in exchange for Eykona shareholders receiving Preferred Shares in Fuel 3D.

Update since 2015: Following the launch of the 3D scanner for the consumer market, the company received approaches from businesses, particularly those providing personalised solutions to consumers - an example is orthotics where using the scanner can automate the process of making shoes inexpensively for people whose feet are different in size and/or shape. The business model being pursued in the B2B market is expected to generate recurring income. Key progress has been as follows:

• in May 2016, a Horizon 2020 €1.7 million grant was secured to develop 270-degree 3D scanner to support the provision of customised eyewear; and
• in June 2016, the first enterprise system, the CryoScan3D, was launched in partnership with Cryos Technologies (an innovator in the orthotics sector).

The company raised further funds in 2016, and is completing an £8 million fundraising in 2017.

6. Arecor Limited

               

Initial investment date:	January 2008	Arecor was a spin-out from Insense (a Hygea investee company - see below) to commercialise technology developed by Insense for enabling biologics to maintain their integrity without the need for refrigeration - this both reduces cost and also helps supply chain logistics in developing countries where temperature monitored cold storage facilities are in short supply. The technology also assists in maintaining the integrity and function of proteins exposed to ionizing radiation as the means of sterilisation.
Cost:	£141,000
Valuation:	£186,000
Equity held:	2.1%
Last audited accounts:	31 May 2016
Turnover:	£1,030,000
Profit before tax:	£127,000
Net assets:	£216,000
Valuation method:	Price of last fundraise

The company is transitioning from a research based enterprise into a sustainable commercial organization focused in the areas of diabetes, peptides, high concentration proteins and biosimilars. This process has been assisted by the appointment of a new CEO in May 2015, since when the business has developed from reliance on one major client.

Update since 2015: key progress has been as follows:

1. in July 2016, a partnership was entered into with the Juvenile Diabetes Research Foundation (JRDF) with the objective of accelerating the development of a stable, rapid-acting, ultra-concentrated insulin - JDRF will provide $900,000 of funding to support the project to the end of non-clinical studies;
2. the company ended 2016 with relationships with 4 multi-product development partners; and
3. in February 2017, a partnership was entered into with Innovate UK providing a £1.05M grant to advance  Arecor's  proprietary  stable  liquid glucagon product towards proof of concept  in Phase I clinical trials.
    
4. ImmunoBiology Limited

Initial investment date:	November 2005	ImmunoBiology is a biotechnology company that is focused on developing treatments for illnesses such as meningitis, tuberculosis, influenza and hepatitis C. The company's technology is based on the discovery that a group of proteins known as 'heat shock proteins' has a pivotal role in controlling the normal immune response to infections. It has also licensed in Scancell's immunobody technology (see above) for use in certain treatments - both approaches seek to educate the immune system how to respond.
Cost:	£868,000
Valuation:	£126,000
Equity held:	2.5%
Last audited accounts:	31 May 2016
Turnover:	£nil
Loss before tax:	£1.9 million
Net assets:	£1.2 million
Valuation method:	Price of last fundraise

The focus is currently on a vaccine for Pneumococcal Disease, for which the challenge is that there are >90 strains in circulation but present treatments address only a small proportion. In December 2015 a first in human study started.

Update since 2015: the trial referred to above was successful with no safety issues and good immunogenicity. On the back of this human data, the company is seeking a licensor or buyer of the technology.

8. Insense Limited

Initial investment date:	July 2003	Insense was spun-out from Unilever's R&D laboratory in Bedfordshire, with the purpose of developing new wound healing products that are based on the oxygenation of the wound through the action of its patented Oxyzyme technology. It has since had two spin-outs, namely Arecor (see above) and Microarray, leaving it developing a fungal nail treatment.
Cost:	£509,000
Valuation:	£121,000
Equity held:	8.1%
Last audited accounts:	31 December 2015
Turnover:	£54,000
Loss before tax:	£259,000
Net assets:	£328,000
Valuation method:	Price of last fundraise

Update since 2015: good progress has been made with the preparatory work to undertake clinical trials with the fungal nail treatment.

9. Exosect Limited

Initial investment date:	January 2010	Exosect was spun-out of Southampton University in 2001 to commercialise innovative pest control technology and reduce the use of insecticides. Until 2015, it sought to develop its own pesticide products. However, following a change of CEO, the strategy was changed whereby the company regarded its technology as  a platform for helping pesticide manufacturers target their products more accurately and thereby achieve environmental benefits (through enabling a 50% reduction in active ingredients required as currently more than 50% of applied agrochemicals do not reach their intended target) with resulting cost savings.
Cost:	£270,000
Valuation:	£120,000
Equity held:	1.3%
Last audited accounts:	31 December 2015
Turnover:	£165,000
Loss before tax:	£2.3 million
Net assets:	£2 million
Valuation method:	Price of last fundraise

Update since 2015: in March 2016, Talc USA (one of the largest talc suppliers for seed lubrication in the US) entered into a manufacture and license for launch initially into the Canadian market, where the use of talc and graphite fluency agents in seed treatment were banned in 2014. In January 2017, the scope of the license was increased to include the US.

10. EKF Diagnostics Holdings plc

Initial investment date:	June 2010	EKF Diagnostics is an in vitro diagnostic devices business, with a particular focus on applications which will benefit most from the migration of routine diagnostic testing from the clinical laboratory to PoC - a particular focus is in the area of diabetes. EKF has an estate of over 90,000 analysers in regular use in more than 100 countries running more than 56m tests every year.
Cost:	£119,000
Valuation:	£96,000
Equity held:	<1%
Last audited accounts:	31 December 2015
Turnover:	£30 million
Loss before tax:	£15.8 million
Net assets:	£46.8 million
Valuation method:	Bid price of 16.25p per share

Update since 2015: 2016 was a year of substantial change with i) Harwood Capital acquiring a 28% shareholding through subscribing new funds, ii) the founder of Harwood becoming chairman of EKF, and iii) closure of EKF's lossmaking molecular diagnostics division, leaving the company able to focus on its PoC business. These changes have stabilised the business after a challenging 2015, with the January 2017 update reporting that the final results to December 2016 are anticipated to show sales of over £38.0 million (2015: £30.0 million) and EBITDA comfortably exceeding £5.5 million (2015: £348,000 loss). EKF is currently evaluating plans under which it would split into two companies based on the business divisions (point of care and lab diagnostics).

Directors' Report

The Directors present their Report and the audited Financial Statements for the year ended 31 December 2016.

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

Review of Business Activities
The Directors are required by s417 of the Companies Act 2006 to include a Business Review to shareholders.  This forms part of the Strategic Report. The Chairman's Statement and the Investment Review also form part of this Strategic Report.

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

Subsequent to the year end, to cover running costs, the Company sold 208,727 shares in EKF. This is in addition to the 697,688 EKF shares, 137,900 Omega shares, and 1,000,000 shares in Reneuron sold during the year.

 

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

	31 December 2016	31 December 2015
	Number of Shares	Number of Shares
John Hustler	190,000	190,000
Charles Breese	105,000	105,000
Richard Roth	209,612	159,612

All of the Directors' shares were held beneficially. There have been no changes in the Directors' share interests between 31 December 2016 and the date of this report.

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

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

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

Management
Since 30 July 2007 the Board has assumed responsibility for the management of the Company and its portfolio.  The Board continues to review and evaluate the management of the Company in the light of present circumstances whereby the resources of the Company are fully invested in portfolio companies. It does not believe that it would be cost effective to seek to appoint a third party manager at the present time.  The terms of the Board's remuneration are set out in the Directors' Remuneration Report.

Share Issues and Open Offers
During the year, the Company did not issue any shares (2015: nil).

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

Directors
Biographical details of the Directors are shown on page 20 of the Annual Report and Accounts.

In accordance with best practice, all of the Directors will retire and offer themselves for re-election at the forthcoming AGM.
            
The Board is satisfied that, following individual performance appraisals, the Directors retiring by rotation continue to be effective and to demonstrate commitment to the role and therefore offer themselves for re-election with the support of the Board.

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

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

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

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

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

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

Substantial Shareholdings
At 31 December 2016, two disclosures of major shareholdings had been made to the Company under Disclosure and Transparency Rule 5 (Vote Holder and Issuer Notification Rules).

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

 No other changes have been notified to the Company.

Annual General Meeting
Notice convening the 2017 Annual General Meeting of the Company and a form of proxy in relation to the meeting are enclosed separately. Part of the business of the AGM will be to consider resolutions in relation to the following matters:

1. Independent Auditor

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

1. Directors' Authority to Allot Shares, to Disapply Pre-emption Rights

Resolution 8 renews the Directors' authority to allot Ordinary shares. This would enable the Directors until the next AGM, to allot up to 405,768 ordinary shares (representing approximately 5% of the Company's issued share capital as at 7 April 2017).

Resolution 9 renews the Directors' authority to allot equity securities for cash without pre-emption rights applying in certain circumstances. This Resolution would authorise the Directors, to issue Ordinary shares for cash without pre-emption rights applying up to a maximum of 405,768 Ordinary shares (representing approximately 5% of the Company's issued share capital as at 7 April 2017).

The Directors have no current intention to utilise the authorities under Resolution 8 and 9.
By Order of the Board

Craig Hunter
Company Secretary
7 April 2017

Directors' Remuneration Report and Policy

Introduction
This report is submitted in accordance with the requirements of s420-422 of the Companies Act 2006, in respect of the year ended 31 December 2016. A resolution to approve the Directors' Remuneration Report will be proposed at the Annual General Meeting on 19 May 2017. The statement of Directors' Remuneration Policy was approved by shareholders at the Annual General Meeting on 2 June 2016.

The Company's independent auditor, James Cowper Kreston, is required to give its opinion on certain information included in this report as indicated below. Their report on these and other matters is set out below.

Consideration by the Directors of Matters Relating to Directors' Remuneration
The Board as a whole considers Directors' remuneration and has not appointed a separate committee in this respect.  During 2015, the Board appointed Richard Roth to advise, inter alia, on Directors' remuneration, including the Performance Incentive Fee. The results of this review are explained below.

Statement of the Company's policy on Directors' Remuneration 
The Board manages the Company and consists of three Directors, who meet formally as a Board at least four times a year and on other occasions as necessary, to deal with the important aspects of the Company's affairs.  The Directors, as members of the Commercial Advisory Committee ('CAC'), are responsible for the investment management of the Company. Directors are appointed with the expectation that they will serve for a period of at least three years.  All Directors retire at the first general meeting after election and thereafter one third of all Directors are subject to retirement by rotation at subsequent Annual General Meetings. Directors who have served for more than nine years are subject to annual re-election in line with practices recommended in the AIC Corporate Governance Code. Re-election will be recommended by the Board but is dependent upon a shareholder vote.

Each Director has received a letter of appointment. A Director may resign by notice in writing to the Board at any time. With effect from 7 October 2015, the Directors are entitled to compensation payable upon early termination of their contract in respect of any unexpired notice period and a pro rata proportion of any performance fees payable to the Commercial Advisory Committee accruing at the date of resignation up to five years from the date of resignation.

Following the review of the cost base of the Company, and in view of the current investment status of the Company's portfolio, the Board decided to reduce the annual Directors' fees with effect from 1 July 2015 and the Chairman is no longer paid a higher fee than other Non-executive Directors. With effect from 1 July 2015, the fee for each Director was set at £12,000 per annum. The Board was also entitled to be repaid all reasonable travelling, subsistence and other expenses incurred by them whilst conducting their duties as Directors. However, from 1 January 2016, the Directors' fees were increased to £12,750 per annum inclusive of all expenses to simplify administration.

In addition to the reduction in the Directors' fees by just over one third, the terms of the performance incentive fee were revised under an agreement dated 7 October 2015. The new arrangements have frozen the sum due to those Directors serving up to 7 October 2015 at £702,000 (the accrued liability as disclosed in the 2014 audited Financial Statements) which will only start to become payable once a further 55.75p of dividends have been paid in respect of each share (such that original subscribing shareholders will have received 80p per share in dividends). This liability will then be paid at the rate of 25% of subsequent dividends until a liability of £702,000 has been discharged; this is in keeping with the original approved arrangement. Following the payment of this liability, any further performance fee in the future will be payable at the reduced rate of 10% of total distributions above the audited total return at 31 December 2014, with the outstanding balance subject to a hurdle rate of 6% per annum, and will be split between the CAC based on a formula driven by relative length of service starting from 7 October 2015. Further details of the revised arrangements are set out in Note 5 to the Financial Statements.

Company Performance
The Board is responsible for the Company's investment strategy and performance.

Directors' Emoluments (Information Subject to Audit)
Amount of each Director's emoluments:

Directors' fees	Year ended	Year ended
	31 December 2016	31 December 2015
	£	£
John Hustler (Chairman)*	12,750	14,750
Charles Breese	12,750	14,750
Richard Roth**	12,750	2,769
James Otter * and **	-	16,231
Total	38,250	48,500

* On 14 July 2015 James Otter resigned as Chairman of the Board and John Hustler was appointed as Chairman.
** On 7 October 2015 James Otter resigned as a Director and Richard Roth was appointed as a Non-executive Director.

As referred to above, Richard Roth was appointed as a Consultant from 1 July 2015 until he joined the Board as a Director on 7 October 2015. He was paid £2,500 in respect of these services.

The Directors did not receive any other form of emoluments in addition to the directors' fees during the year. The current Directors, as members of the CAC, may be entitled to performance fees in the future as referred to above. Directors may be entitled to fees from investee companies when acting on the Company's behalf as Director, Observer or Consultant to those investees.

By order of the Board

Craig Hunter
Company Secretary
7 April 2017

Income Statement

There was no other Comprehensive Income recognised during the year

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

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

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

Statement of Changes in Equity

	Share Capital	Special distributable reserve	Capital redemption reserve	Capital reserve gains/ (losses)	Capital reserve  holding gains/ (losses)	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
As at 1 January 2015	4,058	3,397	38	(165)	1,495	(1,489)	7,334
Revenue return on ordinary activities after tax	-	-	-	-	-	(154)	(154)
Performance fee allocated as capital expenditure	-	-	-	301	-	-	301
Current period gains on disposal	-	-	-	3	-	-	3
Current period losses on fair value of investments	-	-	-	-	(1,355)	-	(1,355)
Prior years' unrealised gains now realised	-	-	-	5	(5)	-	-
Balance as at 31 December 2015	4,058	3,397	38	144	135	(1,643)	6,129
Revenue return on ordinary activities after tax	-	-	-			(129)	(129)
Performance fee allocated as capital expenditure	-	-	-	146	-	-	146
Current period gains on disposal	-	-	-	25	-	-	25
Current period losses on fair value of investments	-	-	-	-	(624)	-	(624)
Prior years' unrealised losses now realised	-	-	-	(436)	436	-	-
Balance as at 31 December 2016	4,058	3,397	38	(121)	(53)	(1,772)	5,547

Refer to note 13 for movement in shareholders' funds.

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

Balance Sheet
		As at 31 December 2016		As at 31 December 2015
	Notes	£'000	£'000	£'000	£'000
Fixed asset investments*	9		6,038		6,753
Current assets:
Debtors	10	4		6
Bank Overdraft		(185)		(169)
Creditors: amounts falling due within one year	11	(55)		(60)
Net current assets			(236)		(223)
Creditors: amounts falling due more than one year	11	(255)		(401)
Net assets			5,547		6,129
Called up equity share capital	12		4,058		4,058
Share premium	13		-		-
Special distributable reserve	13		3,397		3,397
Capital redemption reserve	13		38		38
Capital reserve - gains and losses on disposals	13		(121)		144
- holding gains and losses	13		(53)		135
Revenue reserve	13		(1,772)		(1,643)
Total equity shareholders' funds			5,547		6,129
Net asset value per share	8		68.3p		75.5p

*At fair value through Income Statement

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

The statements were approved by the Directors and authorised for issue on 7 April 2017 and are signed on their behalf by:

John Hustler
Chairman
Company No: 04221489

Statement of Cash Flows

	Notes	Year to 31      December  2016 £'000	Year to 31      December  2015 £'000
Cash flows from operating activities
Return on ordinary activities before tax		(582)	(1,205)
Adjustments for:
Decrease in debtors	10	2	2
Decrease in creditors	11	(151)	(301)
Gain on disposal of fixed assets	9	(25)	(3)
Loss on valuation of fixed asset investments	9	624	1,355
Cash from operations		(132)	(152)
Income taxes paid	6	-	-
Net cash used in operating activities		(132)	(152)
Cash flows from investing activities
Purchase of fixed asset investments	9	(35)	(49)
Sale of fixed asset investments	9	151	16
Total cash flows from investing activities		116	(33)
Cash flows from financing activities
Total cash flows from financing activities		-	-
Decrease in cash and cash equivalents		(16)	(185)
Opening cash and cash equivalents		(169)	16
Closing cash and cash equivalents		(185)	(169)

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

Notes to the Financial Statements

1.             Principal Accounting Policies

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

The principal accounting policies have remained materially unchanged from those set out in the Company's 2015 Annual Report and Financial Statements. A summary of the principal accounting policies is set out below.

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

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

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

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

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

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

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

Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts.
Fixed asset investments
The Company's principal financial assets are its investments and the policies in relation to those assets are set out below. 

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

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

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

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

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

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

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

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

For investments not quoted in an active market:
Level c: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable data (eg the price of recent transactions, earnings multiple, discounted cash flows and/or net assets) where it is available and rely as little as possible on entity specific estimates.  If all significant inputs required to fair value an instrument are observable, the instrument is included in level c (i). If one or more of the significant inputs is not based on observable market data, the instrument is included in level c (ii). The split of the investment categories is shown in note 9.

There have been no transfers between these classifications in the year (2015: none). The change in fair value for the current and previous year is recognised through the profit and loss account.

Current asset investments
No current asset investments were held at 31 December 2016 or 31 December 2015.  Should current assets be held, gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve - gains/(losses) on disposal. 

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

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

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

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

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

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

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

Capital management is monitored and controlled using the internal control procedures detailed on page 25 of the annual report and accounts.  The capital being managed includes equity and fixed-interest investments, cash balances and liquid resources including debtors and creditors.

The Company does not have any externally imposed capital requirements.

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

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

Special distributable reserve - includes cancelled share premium available for distribution.

Capital reserve - holding gains and losses - arises when the Company revalues the investments still held during the period with any gains or losses arising being credited/ charged to the Capital reserve - holding gains and losses.

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

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

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

2. Income

	Year to 31 December 2016	Year to 31 December 2015
	£'000	£'000
Dividends received	-	-
Loan note interest receivable	-	-
	-	-

3. Other Expenses

	Year to 31 December 2016	Year to 31 December 2015
	£'000	£'000
Directors' remuneration	38	49
Fees payable to the Company's auditor for the audit of the Financial Statements	9	9
Fees payable to the Company's auditor for other services - tax compliance	1	1
Legal and professional expenses	44	55
Accounting and administration services	26	30
Other expenses	11	10
	129	154

For the year ended 31 December 2016 the running costs were 2.3% (2015: 2.5%) of net assets.

4. Directors' Remuneration

             

	Year to 31 December 2016	Year to 31 December 2015
	£	£
Directors' emoluments:
John Hustler (Chairman)*	12,750	14,750
Charles Breese	12,750	14,750
Richard Roth**	12,750	2,769
James Otter* and **	-	16,231
	38,250	48,500

* On 14 July 2015 James Otter resigned as Chairman of the Board and John Hustler was appointed as Chairman.
** On 7 October 2015 James Otter resigned as a Director and Richard Roth was appointed as a Non-executive Director.

None of the Directors received any other remuneration from the Company during the year. The Directors may become entitled to receive a share of the Performance Incentive Fee as detailed in the Directors' Remuneration Report and in note 5. The Company has no employees other than non-executive Directors.  The average number of non-executive Directors in the year was three (2015: three).

5. Performance fees

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

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

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

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

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

As at 31 December 2016, the Total Gross Return is 95.7p, and so 3.15p per share totalling £255,000 has been accrued (31 December 2015 104.7p, 4.94p and £401,000).

Assuming no dividends are paid during the year, the Total Gross Return would need to exceed 140.5p at 31 December 2017 before any fee above £702,000 could be due, and at that time, it would be 10% of any cash payments made above this threshold.  If such a performance fee is not triggered (as it has not been in this financial year) the hurdle, net of dividends paid, increments by a compound annual growth rate of 6%, applied quarterly.

6. Tax on Ordinary Activities

The corporation tax charge for the period was £nil (2015: £nil).
The current rate of tax is the small companies' rate of corporation tax at 20.0% (2015: 20.0%)

Current tax reconciliation:	Year to 31 December 2016	Year to 31 December 2015
	£'000	£'000
Return on ordinary activities before tax	(582)	(1,205)
Current tax at 20.0% (2015: 20.0%)	(116)	(241)
Gains/losses not subject to tax	120	270
Excess management expenses carried forward	(4)	(29)
Total current tax charge and tax on results of ordinary activities	-	-

The company has excess management expenses of £2,592,000 (2015: £2,609,000) to carry forward to offset against future taxable profits.

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

7. Earnings per Share

             
The earnings per share is based on 8,115,376 (31 December 2015: 8,115,376) shares, being the weighted average number of shares in issue during the year, and a return for the year totalling (£582,000) (31 December 2015: (£1,205,000)).

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

8. Net Asset Value per Share 

             
The calculation of NAV per share as at 31 December 2016 is based on 8,115,376 ordinary shares in issue at that date (31 December 2015: 8,115,376).

9. Fixed Asset Investments

             

		Level a: AIM-quoted investments	Level c (ii): Unquoted  investments	Total investments
		£'000	£'000	£'000
	Valuation and net book amount:
	Book cost as at 1 January 2016	1,502	5,116	6,618
	Cumulative revaluation	1,932	(1,797)	135
	Valuation at 1 January 2016	3,434	3,319	6,753
	Movement in the year:
	Purchases at cost	-	35	35
	Disposal proceeds	(151)	-	(151)
	Gain/(loss) on disposal	25	-	25
	Revaluation in year	(871)	247	(624)
	Valuation at 31 December 2016	2,437	3,601	6,038
	Book cost at 31 December 2016	1,291	4,800	6,091
	Revaluation to 31 December 2016	1,146	(1,199)	(53)
	Valuation at 31 December 2016	2,437	3,601	6,038

Further details of the fixed asset investments held by the Company are shown within the Investment Review.

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

10. Debtors

             

	31 December 2016	31 December 2015
	£'000	£'000
Prepayments and accrued income	4	6
	4	6

11. Creditors

	31 December 2016	31 December 2015
	£'000	£'000
Amounts falling due within one year
Accruals	26	24
Trade creditors	-	7
Other creditors	29	29
Total amounts falling due within one year	55	60
Amounts falling due after one year
Accruals	255	401
Total amounts falling due after one year	255	401

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

12. Share Capital

             

	31 December 2016	31 December 2015
	£'000	£'000
Allotted and fully paid up:
8,115,376 Ordinary shares of 50p (2015: 8,115,376)	4,058	4,058

The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective.

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

13. Movement in Shareholders' Funds

             

	Year ended 31 December 2016	Year ended 31 December 2015
	£'000	£'000
Shareholders' funds at start of year	6,129	7,334
Return on ordinary activities after tax	(582)	(1,205)
Shareholders' funds at end of year	5,547	6,129

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

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

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

During 2010, the Company revoked investment company status in order to allow payment of dividends from distributable reserves. Distributable reserves are represented by the special distributable reserve, the capital reserve gains/(losses) on disposal and the revenue reserve reduced by negative holding reserves (if any) which total £1,451,000 as at 31 December 2016 (2015: £1,898,000).

14. Financial Instruments

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

Classification of financial instruments
The Company held the following categories of financial instruments, all of which are included in the balance sheet at fair value, at 31 December 2016 and 31 December 2015:

	31 December 2016	31 December 2015
	£'000	£'000
Financial assets at fair value through profit or loss
Fixed asset investments	6,038	6,753
Total	6,038	6,753
Financial assets measured at amortised cost
Debtors	-	-
Total	-	-
Financial liabilities measured at amortised cost
Bank Overdraft	(185)	(36)
Creditors	(29)	(169)
Total	(214)	(205)

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

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

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

15. Financial Risk Management

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

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

Details of the Company's investment portfolio at the balance sheet date are set out on in the Investment Review.

64.9% (2015: 54.2%) by value of the Company's net assets comprise investments in unquoted companies held at fair value.  The valuation methods used by the Company include the application of a price/earnings ratio derived from listed companies with similar characteristics, and consequently the value of the unquoted element of the portfolio can be indirectly affected by price movements on the London Stock Exchange. A 10% overall increase in the valuation of the unquoted investments at 31 December 2016 would have increased net assets and the total return for the year by £360,000 (2015: £331,900) disregarding the impact of the performance fee; an equivalent change in the opposite direction would have reduced net assets and the total return for the year by the same amount. 

43.9% (2015: 56.0%) by value of the Company's net assets comprises equity securities quoted on AIM. A 10% increase in the bid price of these securities as at 31 December 2016 would have increased net assets and the total return for the year by £244,000 (2015: £343,000) disregarding the impact of the performance fee; a corresponding fall would have reduced net assets and the total return for the year by the same amount.

Credit risk
There were no significant concentrations of credit risk to counterparties at 31 December 2016 or 31 December 2015.

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

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

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

16. Events After the Balance Sheet Date

Subsequent to the year-end, 208,727 shares in EKF Diagnostics have been sold for net proceeds of £40,000 to provide liquidity to cover operational costs.

17. Contingencies, Guarantees and Financial Commitments

There were no contingencies, guarantees or financial commitments as at 31 December 2016 (2015: £nil).

18. Related Party Transactions

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

Charles Breese is a director of OR Productivity and received £nil from OR Productivity in fees for his support during the year (2015: £nil). During the year Larpent Newton & Co Ltd, a company controlled by Charles Breese, acquired shares in OR Productivity.

Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of Hygea vct plc ("the Company") will be held at the offices of Octopus Investments, 33 Holborn, London, EC1N 2HT on Friday 19 May 2017 at 12.00 noon for the following purposes:

ORDINARY BUSINESS

To consider and if thought fit, pass the following as Ordinary Resolutions:

1. THAT the Directors' Annual Report and Financial Statements and the auditors' report thereon for the year ended 31 December 2016 be received and adopted.
2. THAT the Directors' Remuneration Report in respect of the year ended 31 December 2016 be received and adopted.
3. THAT Charles Breese be re-elected as a Director of the Company.
    
4. THAT John Hustler be re-elected as a Director of the Company.
    
5. THAT Richard Roth be re-elected as a Director of the Company.
    
6. THAT James Cowper Kreston be re-appointed as auditors of the Company until the conclusion of the next Annual General Meeting of the Company at which accounts are laid before the Members.
    
7. THAT the Directors be authorised to determine the auditor's remuneration.

SPECIAL BUSINESS

8. AUTHORITY TO ALLOT RELEVANT SECURITIES

THAT the Directors be and are generally and unconditionally authorised in accordance with s551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company up to a maximum nominal amount of £202,884 (representing approximately 5% of the Ordinary share capital in issue at today's date such authority to expire at the later of the conclusion of the Company's Annual General Meeting next following the passing of this Resolution and the expiry of 15 months from the passing of the relevant Resolution (unless previously revoked, varied or extended by the Company in a general meeting but so that such authority allows the Company to make offers or agreements before the expiry thereof, which would or might require relevant securities to be allotted after the expiry of such authority).

To consider and, if thought fit, pass the following as a Special Resolution:

9. EMPOWERMENT TO MAKE ALLOTMENTS OF EQUITY SECURITIES

THAT the Directors pursuant to s571 of the Companies Act 2006 be empowered to allot or make offers or agreements to allot equity securities (as defined in s560(1) of the said Act) for cash pursuant to the authority referred to in Resolution 8 as if s561 (1) of the Act did not apply to any such allotments and so that:

1. reference to allotment in this Resolution shall be construed in accordance with s560(2) of the Act; and
    
2. the power conferred by this Resolution shall enable the Company to make any offer or agreement before the expiry of the said power which would or might require equity securities to be allotted after the expiry of the said power and the Directors may allot equity securities in pursuance of such offer or agreement notwithstanding the expiry of such power.

And this power, unless previously varied, revoked or renewed, shall come to an end at the conclusion of the Annual General Meeting of the Company next following the passing of this Resolution or, if earlier, on the expiry of 15 months from the passing of this Resolution.

By order of the Board    Craig Hunter Company Secretary 7 April 2017

Registered Office: 39 Alma Road St Albans AL1 3AT

           
NOTES:
(a)          A member entitled to attend and vote at the Annual General Meeting may appoint one or more proxies to attend and vote on his or her behalf. A proxy need not be a member.
(b)        A form of proxy is enclosed which, to be effective, must be completed and delivered to the registrars of the Company, Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, B63 3DA so as to be received by no later than 48 hours before the time the Annual General Meeting is scheduled to begin. The completion and return of the form of proxy will not affect the right of a member to attend and vote at the Annual General Meeting.

(c)      Copies of the Directors' Letters of Appointment, the Register of Directors' Interests in the Ordinary shares of the Company kept in accordance with the Listing Rules and Articles of Association will be available for inspection at the registered office of the Company during usual business hours on any weekday from the date of this notice until the Annual General Meeting, and at the place of that meeting for at least 15 minutes prior to the commencement of the meeting until its conclusion.