Downing ONE VCT plc : Final Results DOWNING ONE VC

DOWNING ONE VCT PLC
LEI: 213800R88MRC4Y3OIW86
Report & Accounts for the year ended 31 March 2018

FINANCIAL SUMMARY

CHAIRMAN'S STATEMENT

I am pleased to present the Company's Annual Report for the year ended 31 March 2018.

The year saw a reasonable amount of investment activity along with the completion of a successful offer for subscription which has provided the Company with further funds for investment and increased the size of the Company.

Net asset value and results
As at 31 March 2018, the net asset value per share ("NAV") stood at 87.5p, an increase of 4.6p (5.1%) after adding back dividends of 7.5p per share which were paid during the year.

The Income Statement shows a return attributable to equity shareholders for the year of £4.8 million comprising a revenue gain of £2.1 million and a capital return of £2.7 million.

Fundraising
The Company launched an offer for subscription in September 2017, which closed in April 2018 having reached the full capacity of £30 million. With the size of the Company now increased, the burden of the fixed running costs on all Shareholders is reduced and the task of starting to invest the new funds is now underway.

Investment activity and performance
At the year end, the Company held a portfolio of 79 investments. Of these, 31 are either quoted on AIM or the NEX Exchange Growth Market and have a value of £30.0 million (36.8% of the portfolio). The 48 unquoted investments have a value of £51.6 million and represent 63.2% of the portfolio.

Further details on the investment activity are included in the Investment Adviser's Reports.

Dividends
The Company has a policy of seeking to pay annual dividends of at least 4% of net assets per annum.

The Board is again proposing to pay a final dividend higher than the target level in view of the level realisations achieved. A final dividend of 3.0p per share to be paid on 24 August 2018, subject to Shareholder approval at the forthcoming AGM, to Shareholders on the register at 3 August 2018. This will bring total dividends in respect of the year ended 31 March 2018 to 6.0p per share (2017: 7.5p), which represents a yield based on opening NAV of 6.6% pa.

Shareholders are reminded that the Company operates a Dividend Reinvestment Scheme for those investors that wish to reinvest their dividends and obtain further income tax relief on the reinvested dividend. A Dividend Reinvestment Form is available on Downing's website or further information can be obtained by contacting Downing.

Share buybacks
The Company continues to operate a policy of buying in its own shares that become available in the market at a 5% discount to NAV (subject to liquidity and any regulatory restrictions).

During the year, the Company purchased 2,099,238 shares at an average price of 83.8p per share.

The Company retains Panmure Gordon as its corporate broker to assist in operating the share buyback process and ensuring that the quoted spread on the Company's shares remains at a reasonable level.

Annual General Meeting
The Company's next Annual General Meeting ("AGM") will be held at Downing LLP, 6^th floor, St. Magnus House, 3 Lower Thames Street, London, EC3R 6HD at 10:45 a.m. on 22 August 2018.

Three items of special business are proposed at the AGM:
- one in respect of the authority to buy back shares as noted above, and.
- two in respect of authority to allotment of shares.

The offer for subscription mentioned above gave investors the opportunity to make regular monthly subscriptions in the company. The authority to allot shares ensures the Company will be able to allot shares to monthly investors and also give the Board the opportunity to consider further fundraising options without having to necessarily incur the expense of seeking separate approval via a circular. Any decision on future fundraising will, of course, give consideration to the level of uninvested funds already held by the Company and the rate of investment.

Outlook
Shareholders will likely be aware that the Government has made significant changes to the VCT scheme in the last two years in order to refocus it towards young growth companies. A feature of Downing ONE is that it holds a substantial portfolio of investments, in both the growth and income focussed categories, made before the latest rule changes. The Company can continue to benefit from holding this broader range of assets, however additions made in the future will mainly now be growth investments. The Board is pleased to report that that the Investment Adviser is generating a steady flow of suitable investment opportunities that fall within the new parameters. Over time, as the available funds are invested, we expect the balance of the portfolio to shift gradually towards growth investments. This will increase the risk profile of the portfolio but also provides the opportunity for greater rewards.

Against this background, the Board has had some initial discussions with the Investment Adviser about the possibility of introducing a performance incentive scheme. Such schemes are common in the VCT industry and are a helpful tool in assisting the Adviser to attract and retain talented and experienced executives.  This is particularly important now that the investment focus has shifted to growth investing and the environment is becoming increasingly competitive.  The Board will work with the Adviser to seek to design a scheme which it believes to be in the best interests of Shareholders and expects to be able to circulate formal proposals to Shareholders for approval in the coming months.

In summary, the Board feels the Company is well positioned in holding a diversified existing portfolio and further developing the portfolio of growth investments with the new funds.

I look forward to meeting Shareholders at the AGM and to reporting developments in my statement with the Half Year Report to 30 September 2018.

Chris Kay
Chairman

INVESTMENT ADVISER'S REPORT - OVERVIEW

Introduction
We are pleased to present a review of the investment portfolio and activity over the last financial year. Our review is split into three parts comprising this overview, a detailed report on the unquoted investments and a report on quoted investments.

Portfolio Overview
At 31 March 2018, the Company held a portfolio with a value of £81.6 million comprising 79 quoted and unquoted companies, across a diverse range of sectors in both growth and income-focussed investments.

A significant proportion of the portfolio is in maturing investments.

Portfolio Performance
The performance of the portfolio over the year has been positive with unrealised gains of £2.3 million (2017: £2.1 million) evenly split between the quoted and unquoted portfolios. Overall 79% of the portfolio is held at a valuation either at or above cost.

The net unrealised gains in the quoted portfolio totalled £1.2 million. The largest unrealised gains in the quoted portfolio were Craneware PLC (£950,000), Tracsis PLC (£732,000) and Anpario PLC (£711,000). These were partially offset by unrealised losses on Universe Group PLC (£567,000) and Downing Strategic Micro Cap Investment Trust PLC (£400,000). Other smaller gains and losses amounted to a net loss of £219,000.

The unrealised gains in the unquoted portfolio totalled £1.1 million. Within the unquoted portfolio the largest unrealised gains were on Data Centre Response Limited (£281,000) and Downing Care Home Limited (£245,000).

Realised profits in the period mostly came from the unquoted portfolio with £510,000 generated from the sale of the Anaerobic Digestion plant, Vulcan Renewables Limited and £464,000 on the full exit from Giving Limited.

Further details on these and other movements can be found within the quoted and unquoted Investment Adviser Reports.

Increased focus on growth investments
The proportion of the portfolio represented by growth investments has increased over the last year. This is mainly due to newer investments made being mostly in the growth category in line with the changes in the VCT regulations that have taken place over the last two years.

Several of the recent unquoted growth investments have been completed alongside funds from the Downing EIS funds which invest in early-stage UK technology companies. As these investee companies become more mature, they generally require further funding rounds to support their growth and this provides a good pipeline of investment opportunities for the Company.

It is our expectation that the proportion of growth investments in the portfolio will steadily increase over the coming years. This will result in a gradual increase of the overall risk profile of the portfolio over time but also provides the Company with greater prospects of benefitting from the higher rewards that can arise from backing such businesses.

Reliable income generation
Whilst the proportion of income-focussed investments by value in the portfolio has declined to 57% (2017:69%), it is comforting to see that income generated in 2018 at over £3.5m across the portfolio is higher than it has been in any year since the merger date (2013)

Portfolio Composition
Following the 2017/18 fundraising and some significant realisations, 30% of the net assets of the Company are currently held in cash. Focus for the coming year is on deploying these funds in to qualifying investments within our investment pipeline.

The diversified portfolio of the Company shows that the main sectors in which the Company has invested are Leisure, Alternative Energy and Software and Computer Services albeit the maximum exposure to any sector is 15%.

Net asset value and results
The net asset value per Share ("NAV") at 31 March 2018 stood at 87.5p, compared to the NAV at 31 March 2017 of 90.4p. Total Return (NAV plus cumulative dividends paid since the merger in 2013) is 113.0p.

The return on ordinary activities after taxation for the year was £4.8 million, comprising a revenue profit of £2.1 million and a capital profit of £2.7 million.

Outlook
The recent changes to the VCT regulations have ensured that any new investment activity is now focussed on growth investments, being the area where the Government wishes to incentivise the investment of capital. Downing has made adjustments to its investment team as these changes have come into force to ensure that we are able to generate high quality deal flow to meet the Company's demands. Our pipeline of suitable investments is now developing well and should allow us to invest a significant proportion of the available funds over the coming year.

We are reasonably satisfied with the existing portfolio which comprises a significant number of investments. Close monitoring and support of these businesses will continue to be a primary activity for the team over the next year, as well as pursuing exit opportunities from the more mature businesses as and when they arise.

Downing LLP
INVESTMENT ADVISER'S REPORT - UNQUOTED PORTFOLIO

We present a review of the unquoted investment portfolio for the year ended 31 March 2018.

Investment activity
At 31 March 2018, the unquoted portfolio of 48 investments was valued at £51.6 million.  

During the period, the Company invested a total of £5.1 million in unquoted companies comprising five new opportunities and three follow-on investments.  In addition, there was a £490,000 share for share restructure of two pub investments (Pabulum and Augusta), which are now both held through Downing Pub EIS One Limited.

The five new investments were as follows: -

Empiribox Holdings Limited (£750,000) provides equipment and training to enable teachers to deliver engaging and practical science lessons to pupils in primary schools across the UK.

Volo Commerce Limited (£567,000) has created an SAAS-based Enterprise Resource Planning platform to support online merchants and brands selling through market places such as Amazon and eBay.

BridgeU Corporation (£394,000) is an educational technology business focussing on student university applications by working to enhance students' decision making and application processes.

E Fundamentals (Group) Limited (£278,000) has developed a Software as a Service (SaaS) analytics tool sold to companies which own consumer brands to enable them to accurately assess the performance of their products when being sold through third party e-commerce sites.

Limitless Technology Limited (£174,000) is a technology company which sells software to enable customer service inquiries to be answered by "ambassadors" - people who don't work for the company, but earn money based on the number of questions they answer and the quality of answers. 

Follow on investments totalling £2.5 million were made into Xupes Limited (£1.2 million), Leytonstone Pub Limited (£850,000) and Curo Compensation Limited (£400,000).

Details of the realisations of investments in the year are set out on below. Total proceeds of £17.7 million were generated, producing profits over holding value of £1.2 million.

Vulcan Renewables Limited, the anaerobic digestion plant near Doncaster, was the biggest disposal during the year and was sold during the summer at a profit of £510,000. 

Giving Limited, which operates the leading online platform for charitable sponsorship in the UK, justgiving.com, in which the Company held a minority interest, was bought out by a US based software developer for 5.5 times the amount invested, a profit of £464,000 for the VCT.

The Scottish licenced leisure companies (City Falkirk Limited, Cheers Dumbarton Limited, Lochrise Limited, and Fubar Stirling Limited) were also disposed of in full, exiting at a modest profit of £121,000 against holding value, after recent years of difficult trading.

Gatewales Limited and Tramps Night Club Limited continue to repay loan notes in line with their agreed repayment schedules.

Rhodes Solutions Limited, Brownfields Trading Limited and Vectis Alpha Limited were set up in 2016 to seek investment opportunities in specific sectors.  No appropriate deals were identified and so the companies have been wound up, returning £7.5 million to the Company in order to invest in new qualifying investments.

Gara Rock Resort Limited (previously Aminghurst Limited) loan notes were redeemed in full and generated proceeds of £672,000.

Loan notes from Mosaic Spa and Health Clubs were partially redeemed generating realised losses recognised in previous year's valuation write downs.

Portfolio valuation
The unquoted portfolio performance for the year was positive, with an uplift in value of £1.1 million (2.0% of opening value).

Data Response Centre Limited has recently completed a bolt-on acquisition and the group is continuing to outperform its budget. There are significant expected synergies from the new partnership which have been ignored for valuation purposes, but give us reason to be positive about the future outlook of the business. A valuation increase of £281,000 has been recognised in the year.

Downing Care Homes Limited, which owns four care homes, was uplifted in value by £245,000 following good performance in the year when occupancy levels at all four homes have continued to improve. We expect the budget will be achieved for this financial year.

The underlying value of the property held in Leytonstone Pub Limited has resulted in a further uplift of £186,000.

FCT No.1 Limited was formerly known as First Care Limited. The Company holds a small interest in the business and an offer was recently received for the shares that was turned down because it is believed that it undervalued the potential value of the company. The valuation has been uplifted to the offer price and this resulted in an uplift of £171,000 (75% uplift over the opening value).

Kimbolton Lodge Limited, the care home in Bedford was valued up by £121,000 in the year on the back of stronger trading.

These gains were partially offset by some valuation write downs in the period totalling £200,000. The most significant decrease in value was Tramps Night Club Limited, the owner of three nightclub sites in central Worcester which reduced in value by £74,000 following a challenging period of trading.

Outlook
Following a series of new investments during the period, we are satisfied with the composition of the portfolio for the year to 31 March 2018 and are confident that the current deal flow will provide the opportunity to build further. In addition, we shall continue to closely monitor the current portfolio companies as they reach maturity.

Downing LLP

INVESTMENT ADVISER'S REPORT - QUOTED PORTFOLIO

Investment activity
As at 31 March 2018, the quoted portfolio was valued at £30.0 million comprising of 31 holdings. Over 48% of the quoted portfolio is accounted for in the top 10 holdings.

The quoted portfolio saw relatively little change in the year. One partial and two full disposals were made, realising gains (versus cost) of £182,000. Hornby plc, the international hobby products group, was a full disposal from the portfolio resulting in a loss against cost of £384,000 and a loss against the brought forward valuation of £43,000. The position was exited prior to a profit warning due to a lack of confidence in new management and the strategy it was seeking to deploy. There were two new quoted holdings in the year, the largest being an investment of £5 million into the Downing Strategic Micro-Cap Investment Trust.

Portfolio Movements
The main positive contributors to performance were Craneware plc, the market leader in Value Cycle solutions for the US healthcare market, which contributed £950,000 of unrealised gains. Growing market opportunities, a record sales pipeline and increasing long-term revenue visibility supports Craneware's continued future growth.

Tracsis plc, a traffic data software company, delivered strong revenue growth over the period. All key financial and operational metrics were comfortably ahead of the previous year, with good progress being made on a number of strategic initiatives. Tracsis' core target markets of rail technology and traffic and transport data services continue to be supported by a favourable market backdrop and positive growth drivers. Tracsis contributed £732,000 of unrealised gains to the portfolio.

Negative contributors to the portfolio included Universe Group plc, a company that develops and supports point of sale, payment and online loyalty solutions for the UK petrol forecourt and convenience store markets. Universe reduced the value of the portfolio by £567,000. The company's performance was dependant on a small number of high value contracts being executed, and delays to these projects drove down the share price. However, Universe has had a solid start to 2018, with a contract extension with a large food retailer as well as the prospect of new business from a major international forecourt operator. Management report that take-up of next generation products and feed-back from customers bodes well for the future.

The Company holds a non-qualifying investment in Downing Strategic Micro-Cap Investment Trust which is a focused portfolio of UK micro-cap investments with the target to achieve compound returns of 15% per year over the long term. The Trust, which is currently trading at a premium, is managed by the Downing team who manage the quoted portfolio of the Company.

This holding was also a negative contributor, reducing the value of the portfolio by £400,000. While the net asset value per share fell, management reported the investment rate is encouraging. The Trust overlays various strategic mechanisms meaning that it seeks definable catalysts to realise the underlying value of portfolio holdings. However, these mechanisms take time to deploy and typically even longer to mature, hence the average investment horizon is around five to seven years.

As the Trust's portfolio matures and these strategic mechanisms evolve, the investment strategy should deliver returns regardless of prevailing market sentiment.

Generally, we are confident of the longer-term prospects for the quoted portfolio.

Downing LLP

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2018:

The Company also invested into Imagelinx plc and Invocas Group plc. These investments were acquired at negligible value and continued to be valued at the same level.

All venture capital investments are unquoted unless otherwise stated.

* Quoted on AIM
** Quoted on the NEX Exchange Growth Market
*** Quoted on the Main Market of the London Stock Exchange

(1) Other funds also managed by Downing LLP as Investment Manager or Adviser as at 31 March 2018:

- Downing TWO VCT plc
- Downing THREE VCT plc
- Downing FOUR VCT plc
- MI Downing UK Micro-Cap Growth Fund
- Downing AIM Estate Planning Service and Downing AIM NISA

Investment movements for the year ended 31 March 2018

Additions

Disposals

* Adjusted for purchases in the year where applicable

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of
Ireland (FRS 102). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

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

- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether the financial statements have been prepared in accordance with applicable UK Accounting Standards, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements and the Directors Remuneration Report comply with the Companies Act 2006.

They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and undertakes and provides the information necessary to assess the Company's position, performance, business model and strategy.

INCOME STATEMENT
for the year ended 31 March 2018

The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). There are no other items of comprehensive income. The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated in January 2017 by the Association of Investment Companies ("AIC SORP").

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2018

* A transfer of £3,213,000 representing previously recognised unrealised losses on disposal of investments during the year ended 31 March 2018 (2017: £1,593,000) has been made from the Capital Reserve realised to the Revaluation reserve.  A transfer of £6.3 million representing realised gains on disposal of investments, less capital expenses and capital dividends in the year (2017: £5.1 million) has been made from Capital Reserves - realised to Special reserve.

BALANCE SHEET
as at 31 March 2018

CASH FLOW STATEMENT
for the year ended 31 March 2018

NOTES TO THE ACCOUNTS
for the year ended 31 March 2018

1. General information
Downing ONE VCT plc ("the Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales, and its registered office is St. Magnus House, 3 Lower Thames Street, London EC3R 6HD.

2. Accounting policies
Basis of accounting
The Company has prepared its financial statements in accordance with the Financial Reporting Standard 102 ("FRS 102") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" issued November 2014 and updated January 2017 ("SORP").

The financial statements are presented in Sterling (£) and rounded to thousands.

Presentation of income statement
In order to better reflect the activities of a Venture Capital Trust and in accordance with guidance issued by the Association of Investment Companies ("AIC"), supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy.

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

Investments quoted on recognised stock markets are measured using bid prices.

The valuation methodologies for unlisted instruments (comprising equity and loan notes), used by the IPEV to ascertain the fair value of an investment, are as follows:
- Price of recent investment;
- Multiples;
- Net assets;
- Discounted cash flows or earnings (of the underlying business);
- Discounted cash flows (from the investment); and
- Industry valuation benchmarks.

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

Where an investee company has gone into receivership, liquidation or administration where there is little likelihood of a recovery, the loss on the investment, although not physically disposed of, is treated as being realised.

Gains and losses arising from changes in fair value are included in the income statement as a capital item.

It is not the Company's policy to exercise significant influence or joint control over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that do not require portfolio investments to be accounted for using the equity method of accounting.

In respect of disclosures required by the SORP for the 10 largest investments held by the Company, the most recent publicly available accounts information, either as filed at Companies House, or announced to the London Stock Exchange, is disclosed. In the case of unlisted investments, this may be abbreviated information only.

Income
Dividend income from investments is recognised when the Shareholders' right to receive payment has been established, normally the ex-dividend date.

Loan stock interest is accrued on a time apportioned basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

Distributions from investments in limited liability partnerships ("LLPs") are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.

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

- Expenses which are incidental to the acquisition of an investment are deducted from the Capital Account.
- Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
- Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Investment management fees are allocated 50% to revenue and 50% to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company.

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

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

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when the obligations or rights crystallise based on tax rates and law enacted or substantively enacted at the balance sheet date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts. Deferred tax assets are only recognised if it is expected that future taxable profits will be available to utilise such assets and are recognised on a non-discounted basis.

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

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

Share issue costs
Share issue costs have been deducted from the special reserve account.

Segmental reporting
The Company only has one class of business and one market.

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

Funds held in respect of shares not yet allotted
Cash received in respect of applications for new shares that have not yet been allotted is shown as "Funds held in respect of shares not yet allotted" and recorded on the Balance Sheet.

3. Basic and diluted return per share

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

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

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

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

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

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

The key investment risks to which the Company is exposed are:

- Investment price risk; and
- Interest rate risk.

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

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

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

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

- "Fixed rate" assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.
- "Floating rate" assets predominantly bear interest at rates linked to the Bank of England base rate and comprise cash at bank.
- "No interest rate" assets do not attract interest and comprise equity investments, non-interest bearing convertible loan notes, loans and receivables (excluding cash at bank) and other financial liabilities.

The Company monitors the level of income received from fixed, floating and non interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

The Bank of England base rate increased from 0.25% per annum to 0.5% per annum in November 2017. Any potential change in the base rate at the current level wouldn't have a material impact on the net assets and total return of the Company.

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

The Investment Adviser manages credit risk in respect of loan notes with a similar approach as described under investment risks above. In addition the credit risk is mitigated by registering floating charges, covering the full par value of the loan stock in the form of fixed and floating charges over the assets of the investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures referred to below.

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

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

As at 31 March 2018, of the loan stock classified as "past due" below, £5,848,000 relates to the principal of loan notes where, although the principal remains within the term, the investee company is not fully servicing the interest obligations under the loan note and is in arrears.  Notwithstanding the arrears of interest, the Directors do not consider that the loan note itself has been impaired or the maturity of the principal has altered.

As at 31 March 2018, of the loan stock classified as "past due" below, £2,690,000 relates to the principal of loan notes where the principal has passed its maturity date. As at the balance sheet date, the extent to which the principal is past its maturity date, £2.7 million falls within the banding of nil to 2 years past due. Notwithstanding this information, the Directors do not consider the loan notes to be impaired at the current time or that maturity dates of the principal have altered.

As at 31 March 2017, of the loan stock classified as "past due" below, £9,848,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is in arrears.  Notwithstanding the arrears of interest, the Directors do not consider that the loan note itself has been impaired or the maturity of the principal has altered.

As at 31 March 2017, of the loan stock classified as "past due" below, £2,101,000 relates to the principal of loan notes where the principal has passed its maturity date. As at the balance sheet date, the extent to which the principal is past its maturity date, £1.4 million falls within the banding of nil to 2 years past due and £0.7 million is 3 to 4 years past due. Notwithstanding this information, the Directors do not consider the loan notes to be impaired at the current time or that the maturity dates of the principals have altered.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company normally has a relatively low level of creditors (2018: £711,000, 2017: £498,000) and has no borrowings. Also, most quoted investments held by the Company are considered to be readily realisable. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons the Board believes that the Company's exposure to liquidity risk is minimal.

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

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 March 2018, but has been extracted from the statutory financial statements for the year ended 31 March 2018 which were approved by the Board of Directors on 12 July 2018 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2017 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

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