Oxford Technology VCTs AGM (2018)

[timbo003]

The 2018 Oxford VCT AGMs were held last week (Thursday 12th July) at the Oxford Technology VCT offices, The Magdalen Centre, Oxford Science Park, Oxford OX4 4GA.

Links to all four Annual Reports (year ending Feb 2018) can be found on the Oxford Technology home page: http://www.oxfordtechnology.com/

There were probably around 25 ordinary shareholders present at this year's AGM. The meeting commenced at 11.00 starting with a brief portfolio review from the Manager with Q&As, this was followed by the four AGMs then presentations from two investee companies: Ixaris (OT3) and Select Technology (OT1, OT2, OT3 and OT4).

Scancell (OT1 and OT3) were also due to make an appearance but they had to cancel at short notice due to illness, so Andrea Mica (Oxford Technology management) stepped up to run quickly through Scancell’s presentation slides which can be found here: https://tinyurl.com/ydgtpxck

The Q1 updates (to May 31st 2018) for all four VCTs were released on June 27th (after the annual reports were published) and these are available at the following link: http://www.oxfordtechnology.com/news.html

The announcements reported small increases in NAV for OT2 (+2%) OT3 (+2%) and OT4 (+4%) and a small decrease for OT1 (-2%), but were otherwise unremarkable.

Manager’s Review:

Lucius Cary (LC) and Andrea Mica (AM) gave shareholders a 15 minute review of the combined VCT portfolio, a fairly large part of the review was taken up describing the circumstances leading to the recent demise of Plasma Antennas, but there were also mentions for a number of other investee companies (see details below)

Plasma Antennas (OT2, OT3 and OT4):
http://plasmaantennas.com

The web site form Plasma Antennas is still available, but all activities in the company have ceased and staff made redundant, the IP and patents are still being supported on a care and maintenance basis. The company came close to being sold at one point, but a competing technology (Phased Arrays) now dominates.


Biocote (OT1):
https://www.biocote.com/

Biocote pays dividends to OT1, but otherwise considered unexciting by the manager.


Get mapping (OT1)
http://www.getmapping.com/

Get mapping is now focused on Africa, as it cannot compete against Ordinance survey in the UK (with its £75m/annum state subsidy)


Diamonds hard surfaces (OT4)
http://www.diamondhardsurfaces.com/chemicals.htm

The Company is currently having a few problems: their proprietary coating performs well in the lab; this has not been the case in practice for one of the intended commercial applications (Ships).


ImmBio (OT2, OT3 and OT4)
http://www.immbio.com/

The level of interest in ImmBio’s lead pneumococcal vaccine (ImmBioVax) shown in the recent past by western based Pharma companies has been disappointing, but there has been considerable interest from China’s CNBG (head of terms agreement recently signed) which appears to be beginning to stimulate interest from Western Pharmas.

Arecor (OT2, OT3 and OT4)
http://arecor.com/

The company’s unique technology of protein solubilisation and stabilisation is currently being developed to produce improved formulations for the management of diabetes, Arecor have recently attracted grant funding of just over £1m to assist with this development.



Q&As:

Q: OT2 is too small to be viable. Why don’t you wind it up by offering shares in the investee companies to OT2 shareholders?

A: The problem with winding up the VCT with an in specie distribution, is that there are many shareholders who purchased their OT2 shares to defer CGT liabilities (indefinitely), and on wind up the CGT liabilities would rematerialize and potentially land the shareholder with a large tax bill. We are currently considering other alternatives, for example, an arrangement similar to that announced by another Hygea (another small VCT) which should result in much reduced running costs.


Q: Can you describe how a Hygea type deal would work?

A: Hygea have struck a deal with a new manager Seneca. This will result in the old Hygea shares remaining as a separate class of share and the new manager raising money for a new class of “B” share. The advantage for Hygea shareholders is that they will not pay any running costs for 3 years; the advantage for the new B shareholders is that they should benefit from the payment of dividends earlier than they would have without Hygea on board. This deal should become effective once £3m has been raised for the B shares, the current B share fund raising has now reached around £2m. This model could become a template for OT2 and possibly the other Oxford VCTs.


Q: The recent performance of OT4 has been abysmal, why don’t you just call an EGM with a resolution to wind it up and then sell off Castleton and the unquoted assets?

A: We are open to suggestions, as there are no CGT deferral considerations for OT4 (unlike OT1, OT2, OT3), although note that we do include a continuation vote at every AGM, so shareholders have the option to vote against continuation without an EGM every year. If we were to rapidly sell off the unquoted assets, we would probably have to accept fire sale prices, whereas if we wait until the right time and the right buyer, some of the assets could be very valuable, for example Arecor could be worth £100m in a few years’ time.


Q: How can we realise the value from Ixaris (note: Ixaris currently represents over 60% of the net assets of OT3)?

A: We are not the dominant shareholder in Ixaris (Foresight own around 18% of the equity, OT3 own around 7.3%), so the disposal time table will be largely up to others, but the company is being prepared for sale and Lucius is an observer on the BOD, it is noteworthy that, Foresight apply a higher value to the company than OT3.


AGM formal business:

The resolutions for each of the VCTs can be found in the annual reports and the results from the proxy voting can be found at the link below:
http://www.oxfordtechnology.com/news.html

The resolutions for OT1, OT3 and OT4 comprised the usual list with the resolution 8 (share buybacks) attracting the customary 5 – 20% of dissenters on the proxies with the other resolutions carried by large or unanimous majorities.

For OT2 all resolutions were passed unanimously, although a share buyback resolution had not been included this year, as there had been a tender offer last year which gave shareholders wishing to exit an opportunity to sell a substantial portion of their shares at a discount to NAV of 15%.


Company Presentations:

Brief notes from the two presentations are set out below:


Ixaris:

Web sites: https://www.ixaris.com/ https://entropay.com/
Presentation slides: not available
Presenter: David Sear (via Skype)

Davis Sear was appointed Chairman at Ixaris last year. He has an impressive track record of building and exiting Fintech businesses and invested in Ixaris as he could see that the business was very scalable.

Ixaris are in the business of providing virtual prepaid VISA cards for use in e-commerce. The business consists of two business units (B2C and B2B).

The B2C division, Entropay, is profitable; it has created 6.5m cards and currently has 2m regular users. Customers are charged a loading fee (4-5% per transaction). Most of the customers are from outside the EU and they use the cards for gambling on EU sites. One potential cloud on the horizon is Visa introducing new directives for cards used for gambling and any pre-paid card will need to be coded for gambling (not clear whether this was due to regulatory pressure or the risk of reputational damage), but in response Ixaris are taking measures to build up the number of EU users of Entropay (currently 15K).

The B2B division, Ixaris solutions, typically charges 2-3% per transaction, which makes it cheaper than other providers; typical customers are travel operators and travel agents. The challenge for the business is to make a profit on each transaction and to diversify the customer base. The division is now profitable on a month by month basis and it is poised to do a deal with a major bank which will show potential investors that it can expand and diversify the business away from just travel.

DS anticipates a liquidity event in around 2 years, which could be a trade sale, or more likely an IPO.



Select Technology:

Web Site: https://www.selectec.com/
Presentation slide set: https://tinyurl.com/y8qszowb
Presenter: Paul Western (MD and founder)

Select Technology started off in 1981 developing hardware solutions for copiers, around 10 years ago they responded to a changing industry and focused on software for copiers (Multi-Functional Devices) resulting in their current flagship product offering, Papercut.

In 2014 they formed IDEA which is an alliance with several other specialist copier companies which were offering complementary services (training, tech support, integration and customisation services etc.), the alliance increases geographical spread for the Papercut product and generates additional revenue (£100K /month) through a 15% commission for reselling products and services from other IDEA members. The company currently has revenues of around £5m and should be able to pay a dividend to shareholders next year.


Lunch:

A cold buffet lunch with wine and soft drinks was provided after the meeting and there was ample opportunity to talk to the Directors, managers and other shareholders. I could not stay for too long as I had another meeting later in the afternoon, but a number of shareholders were still there when I departed.

[Gostevie]

Terrific write-up Tim. Thank you for sharing it.

Gostevie

[scotia]

Tim - thanks for the write up
Looking at one of your notes:-

The resolutions for OT1, OT3 and OT4 comprised the usual list with the resolution 8 (share buybacks) attracting the customary 5 – 20% of dissenters on the proxies with the other resolutions carried by large or unanimous majorities.

Its hardly surprising that the share buybacks resolution has dissenters - but I suspect they are dissenting at the lack of a plausible buy back policy.
Looking at Oxford 3 (which I hold), the resolution states that the maximum buy-back price will be 5% above the average market value. Now the market bid/offer has been stuck at 35/70 for a long time, so I assume that the average market value is 52.5, and with 5% added on, this is 55.125p - yet the NAV is 86.2p. So only those desperate to get out (or the estates of deceased owners) are likely to accept such a level. Indeed, looking at the sales since April, the highest offer seems to have been 51p. I am surprised that Oxford allows such a state of affairs - it certainly will keep clear any new prospective investors.

[timbo003]

Its hardly surprising that the share buybacks resolution has dissenters - but I suspect they are dissenting at the lack of a plausible buy back policy.

For the Oxford VCTs, I think that most of the votes against the buyback resolutions are from the same couple every year (who always sit at the back at the meeting and don't generally ask questions). They are opposed to the buyback resolutions as they are active buyers in the second hand market themselves (providing the discount is big enough) and they do not wish to compete with the VCTs buying shares, thus pushing up prices.

I am surprised that Oxford allows such a state of affairs - it certainly will keep clear any new prospective investors.

The Oxford Tech VCTs have traded with a large discount (and spread) ever since I started following them (around 10 years ago) and probably beyond, but it is probably more justified than it was in the past, as the VCTs are now in controlled run off. However, I believe the directors like to keep the option open to buy back shares, just in case a large chunk became available a very big discount, in which case they may well consider buying them back for cancellation, as doing so would increase the overall NAV of the VCT, thus benefiting all shareholders.

Generally all VCTs trading with small discounts and tight spread employ a broker (in most cases Panmure Gordon) who then provides the capital to purchase the shares from shareholders wishing to sell (irrespective of whether the VCT is in a close period or not), the VCTs then purchase the shares from the broker when they are able to do so. This service might cost in the order of £10K per VCT per year, which is a sizable amount for a small VCT and the directors probably consider that the money could be deployed better elsewhere for the benefit of all shareholders. A significant number of shareholders in OT1, OT2 and OT3 probably don’t ever wish to sell anyway, as they will have used the VCT purchase to defer capital gains liabilities and many of them will want to take those liabilities to the grave.

[scotia]

Tim - thanks for the explanation. I have a small holding in Oxford 3, which I purchased in full knowledge of how it operates - so I have no complaints. I had been thinking about small investors who initially invested in the Oxford VCTs way back, and who may now be forced into a fire sale. I hadn't thought about the Capital Gains coverage. Nor had I thought about the cost of Oxford running a proper share buy-back.
However it would be a brave investor who made any purchases now with the current bid/offer spread of 35/70 and a NAV of 82.6.

[timbo003]

.
So this is what is planned for Oxford 2 VCT

* A new Manager Chelverton (for a new B share class)
* A proposed fund raise (for the new B share class)

* Chelverton pay all costs of the fund raise
* Possibility of a special divi for existing Ord holders (subject to everything going through and a successful fund raise)
* Possibility of early dividends for B share shareholders which would not be possible with a new VCT starting from scratch

https://www.investegate.co.uk/oxford-te ... 0000H3064/

This seems like a sensible way forward, as doing nothing is not an option due to the tiny size of the VCT and the large costs (many of them fixed) associated with running a VCT.

[scotia]

.
So this is what is planned for Oxford 2 VCT

* A new Manager Chelverton (for a new B share class)
* A proposed fund raise (for the new B share class)

* Chelverton pay all costs of the fund raise
* Possibility of a special divi for existing Ord holders (subject to everything going through and a successful fund raise)
* Possibility of early dividends for B share shareholders which would not be possible with a new VCT starting from scratch

https://www.investegate.co.uk/oxford-te ... 0000H3064/

This seems like a sensible way forward, as doing nothing is not an option due to the tiny size of the VCT and the large costs (many of them fixed) associated with running a VCT.

I found this unexpected. All of the Oxford Technologies (1,2,3,4) are small:- £2.84M,£1.69M,£5.85M,£5.28M.
(data from the last annual statements)
I would have thought that consolidation into one, possibly followed by a deal with Chelverton would have made a lot more sense.
It leaves the remaining VCTs 1,3,4 in a less attractive position, since it seems unlikely that there will be a further three suitors.
EDIT:- Further thought - would my suggested consolidation of the 4 VCTs into 1 have affected the sheltering of capital gains?

[Kidman]

I would have thought that consolidation into one, possibly followed by a deal with Chelverton would have made a lot more sense.
It leaves the remaining VCTs 1,3,4 in a less attractive position, since it seems unlikely that there will be a further three suitors.
EDIT:- Further thought - would my suggested consolidation of the 4 VCTs into 1 have affected the sheltering of capital gains?

My belief on the CGT question is 'no'. So long as a VCT merges into another by a scheme of arrangement, all one's tax reliefs continue unchanged.

On the consolidation point, which I agree seems attractive, I wonder whether it can't go ahead because one single Oxford VCT may have too high a stake in one or more investee companies? I can't remember the rules here but believe this was why Titan used an SPV and why Foresight 4 wasn't merged into Foresight 1.