Foresight 4 VCT AGM (2017)

[timbo003]

See below my Magnus Opus from this year's AGM held last Thursday (also posted on the ShareSoc AGM forum)


This year’s Foresight 4 VCT AGM was held on Thursday 28th September 2017 commencing 10:00, at the Foresight Offices, 23rd floor, The Shard, SE1 9SG.

There were around 30 attendees, which included about 15 ordinary shareholders, several representatives from the manager, two investee company directors and the F4 Board of Directors comprising the Chairman Raymond Abbott (RA), Simon Jamieson (SJ) and newly appointed director Michael Gray (MG).

The Annual report for year ending March 2017 can be found here:
http://www.foresightgroup.eu/media/5379 ... t-2017.pdf

ShareSoc have had a long running campaign on Foresight 4 which has focused on a number of related issues, namely: errors in the accounts, controversial dividend payments, poor corporate governance, poorly negotiated merger terms (with Foresight 3) and ineffective/unsuitable directors.

The campaign resulted in very significant votes against all three of the directors at last year’s AGM. The then Chairman (Philip Stevens) was re-elected by the narrowest of margins (50.1% to 49.9%) but subsequently resigned and one of the other directors (Peter Dicks) stepped down soon thereafter.

Since the last year’s AGM, Foresight 4 has merged with Foresight 3 and while some of the problems have been addressed, many issues still persist. Full details of the campaign and a link to ShareSoc’s voting recommendations for this year’s AGM can be found here:
https://www.sharesoc.org/campaigns/foresight-4-vct/
https://www.sharesoc.org/blog/company-n ... eeded-agm/

The meeting commenced with presentations from two of the investee companies (Ixaris Solutions and Protean Software), this was followed by the Managers presentation on the portfolio and separate Q&As followed each presentation, we then finished off with the formal AGM which included voting on the resolutions.

Ixaris Systems

Corporate web site: https://www.ixaris.com/
Consumer and small business web site: https://www.entropay.com/
Value of F4 investment: £3.1m (F4 holds 7.2% of the equity)
Amount Invested: £1.2m
Presenter: Euan Menzies (CFO)

Ixaris Systems’ main revenue generating division is Entropay, a prepaid electronic payment service integrated with the VISA network. Entropay offers advantages over other electronic payment systems such as Paypal, as it employs a virtual VISA card which does not give details of the purchaser and it gives more favourable Forex rates compared to other payment methods. Entropay generated revenue of £9.1m and EBITDA of £3.8m in 2016. The company’s other division, Ixaris, operates IxSol which enables businesses (for example online travel agents) to operate their own applications for receiving payments under the VISA and MasterCard schemes. This division is currently loss making with revenue of £4.0m and EBITDA of -£5.3m for 2016, although the forecast is for it to move into profit in the short to medium term following a recent funding round. A new H1 trading statement is due to be released imminently and the combined group is now trading profitably.

During Q&As, I asked how Ixaris Solutions was valued by the VCT, given that it has one loss making division and one profitable division. The Manager’s response was that Entropay valuation was based on an earnings multiple and the Ixaris division on a revenue multiple (I would assume that once Ixaris (IxSol) becomes EBITDA positive, then this methodology will change).

One shareholder asked if the company was now fully funded, the response was yes, but they could grow faster if they had more funds. Another shareholder asked if they were intended to start paying dividends to shareholders (including F4); the response was that dividends would be a possibility in the relatively near future.

Protean Software:

Web site: https://www.proteansoftware.co.uk/
Value of F4 investment: £1.6m (holds 15.9% of the equity)
Amount Invested: £1.0m
Presenter: Bob Anderson (CEO)

Protean develops and sells field service software to enable White Van man (typically heating engineers, or lift technicians) to work more efficiently. The company currently has 450 business clients and 10,000 users based in the UK. Significantly around 70% of these types of business still use manual systems to manage and track call-outs to customers.

The current plan includes transitioning existing customers from their old legacy software system with a clunky feel (one off purchase with perpetual licence) to a new SaaS based system (monthly subscription) which has a cleaner more user friendly interface with added functionality and accessible whilst in the Van. Protean intend to develop four versions of the new software: Lite, International, Pro and Elite. Each version will have different pricing and different markets in mind. Protean currently have 40 early adopters (253 users) signed up with new SaaS software. The International version will be aimed primarily at the US and it will require a number of essential changes such as date formatting and they aim to be established in the US by Q2 2018.

During Q&As there were a couple of questions concerning the competition. One of the larger competitors is Servicemax and ESM was mention as another, all the main competitor products are SaaS based. When asked what advantages does Protean have over the competition, the response was Protean are just better and this was illustrated by an anecdote concerning the Servicemax product.

I asked for details of how the revenue streams from the legacy product compared to the new (SaaS) software system. Shareholders were told that the legacy system might cost £2.5K for a perpetual licence, with optional updates and servicing offered at a cost of around 20% per year (most legacy customers go for this option apparently). The SaaS based software costs between £25 and £50 per licence (depending on which version of the product was subscribed for). I opined that there didn’t seem to be a great deal of difference in total revenue over a 5 year period between the two systems. BA did not disagree, but added that customers (or potential customers) were more likely to opt for a SaaS system (no large upfront payment) than to go for a perpetual licence (large upfront payment) for budgeting reasons, in addition the updated SaaS software was considered a significant improvement on the legacy software from a user perspective.

Manager’s Presentation

Russell Healy gave the manager’s presentation and he began by explaining that the portfolio consisted entirely of Private Equity (PE) investments, having now disposed of all of the poorly performing environmental investments. All investments are now selected based on a number of criteria: Growth potential, strong management, good clear strategies, attractive entry valuations and revenue generating.

Foresight believe that there is a valuation bubble in and around London, so they have been looking for new investment opportunities further afield in the provinces, through their regional offices.

The new PE portfolio has performed well so far, for example the 2015 vintage PE investments (made just before the last VCT rule changes) have had an aggregate uplift of 35%.

A number of investee companies received a name check during the presentation including Simulity, where Foresight 1 invested £4m in 2016 (F4 had no cash to invest) and then sold out for a 3X multiple a few months later.

Datapath (designs and manufactures multi-screen computer graphics cards) had to get a mention, as it now comprises 26% of the VCT net assets. The company continues to perform well with sales now up to £25m on a 60% margin, despite having already returned 3X the initial investment back to the VCTs.

AIM listed Zoo Digital ( B2B software provider for film sub-titling and dubbing) was also mentioned as one of the less successful recent disposals, with Foresight selling down the last of their once sizable stake after the period end.

General Q&As

Gary Fraser (GF) and Russell Healy (RH) and the BOD fielded the questions. I kicked off with a request to have a later start, as a 10:00 start was inconvenient (and expensive) for many shareholders, I also pointed out that Foresight 1 VCT had agreed to switch the start for their AGM from 10:00 to 11:00. The Chairman seemed slightly surprised by the request, but recognising that most other shareholders present were in agreement, said he would look into the possibility of having a later start time next year.

We then had a couple of questions regarding the recent tender offer: The BOD and manager summarised the outcome from the recent £5m tender and outlined the mechanism by which the excess applications were dealt with. Only 13% of the issued shares were tendered and excess tenders were scaled back to 48% of amount requested, therefore a shareholder tendering all of their shares, would have had 52% of the total purchased in the tender. I commented that given this result, they seemed to have pitched the discount at about the right price, the BOD agreed and then confirmed that it was their intention to conduct another similar tender next year (£5m shares at a 7.5% discount) assuming there were sufficient funds available. There was a question asked on behalf of an absent shareholder regarding his disenfranchisement for the AGM Proxy voting, this was due to his entire holding (held in a HL vantage account) being unavailable for voting as a result of participating in the tender offer, even though he only sold 52% (i.e. the maximum amount) of his holding in the tender. GF said this shouldn’t have happened and the shareholder should contact him and he will take it up with HL. I suggested that if the tender offer and the AGM were held further apart next year, it should prevent a similar situation, the suggestion was noted.

Given that Zoo Digital had been mentioned earlier and I had attended the Zoo Digital AGM earlier in the week (having participated in their recent placing), I asked RH why they had exited their ZOO investment when they did, especially given that it coincided with a discounted placing (in which they could have participated) which transformed the balance sheet. In addition ZOO were poised to launch a new potentially disruptive, cloud based dubbing solution (ZOO dubs) which has been very well received by voice actors and clients alike and since the placing, ZOO digital shares have increased 4 fold in a period of just six months.

RH rattled off a number of stale bull excuses: progress had not met expectations, too much of the business was with just one major customer, unfavourable working capital cycles (pay creditors after 30 days; get paid by debtors after 90 days). Furthermore, market speculation concerning a takeover by Ymagis, an acquisitive film industry participant, gave them an opportunity to get out.

Formal AGM

The Chairman commenced by reading the usual preamble to the resolutions, which prompted an immediate question. I asked the BOD to comment on Sharesoc’s recent correspondence with the Foresight 4 BOD concerning historical errors in the accounts, the alleged illegal dividend payment in Dec 2015, the lack of response from the BOD and ShareSoc’s subsequent letter of complaint to the FRC. The Chairman, Raymond Abbott and director, Simon Jamieson responded by stating that the BOD had considered the matter along with the Auditor and they had reached the conclusion that the dividend paid in December was not illegal and therefore they intended to take no action. I then asked if they would take appropriate action if the FRC concluded that there was an illegal payment, they said they would and this would include calling a GM to obtain the necessary shareholder approvals to correct the situation. They then added that they had a slide which outlined their reasoning that they could either present in the meeting, or discuss after the meeting. I sensed there was little appetite among the other shareholders to delve into the minutiae of historical accounts, so I agreed we could discuss the matter after the meeting. I added that I would be voting in accordance with the ShareSoc recommendations, i.e. to vote against the re-election of the directors and the re-appointment of the auditor. The results of the proxy voting were read out following each resolution, and subsequently released via RNS (see link below)
http://www.londonstockexchange.com/exch ... 79072.html

The total votes cast were around between 11.5m and 12.5m for each resolution which represented around 12 -13% of the total shares in issue (following the recent tender offer). There were significant votes against the two directors up for re-election (14.4 and 14.7%) although somewhat less opposition regarding the re-appointment of the auditor (6.6%). The Chairman concluded by stating that given the significant votes against the two directors the BOD would seek an independent review regarding their performance, although I note that this statement did not appear in the subsequent RNS announcing the outcome of the meeting.

After the meeting the BOD showed me the slide which turned out to be a summary of what they had said earlier on during the meeting, there were no additional insights.

Finally a couple of notable observations from the meeting: the directors sat in the front row of the assembled seats facing the front, rather than in a separate row facing shareholders. The Chairman did not introduce the newly appointed director (Michael Gray) to Shareholders and I suspect most shareholders present were unaware that he was at the meeting, furthermore he remained silent throughout the proceedings.

PostScript

Since the AGM, I have gone back to check the sequence of events following payment of a dividend which was not covered by distributable reserves (in contravention of the Companies Act 2006) by British Smaller Companies VCT, which occurred in 2013.

British Smaller Companies called an EGM to rectify their situation and to absolve the directors from any future liabilities, see links to the RNS giving shareholders notice of the meeting and a link to the meeting resolutions:
https://www.investegate.co.uk/british-s ... 01164948V/
https://drive.google.com/file/d/0B2AtIS ... sp=sharing

The resolutions were subsequently approved by shareholders at the meeting in January, although significantly the Auditor (Grant Thornton) was dismissed soon thereafter.
https://www.investegate.co.uk/british-s ... 07159837Y/

Should FRC rule that ShareSoc are correct with respect to their analysis of accounting errors and the dividend payment, I would assume a similar chain of events would follow, but I am not sure whether F4 shareholders would be quite so forgiving as the British Smaller Companies shareholders were with respect to absolving past and present directors, given the events over the last year or so.

[BusyBumbleBee]

I think, Tim, that you have stunned people with such a full report - so much so that you have received no comment at all - so, at least a
BIG thank-you
from me for that fantastic work - with kind regards - John

[Raptor]

I think, Tim, that you have stunned people with such a full report - so much so that you have received no comment at all - so, at least a
BIG thank-you
from me for that fantastic work - with kind regards - John

Got 6 recs so far, so much appreciated by some.

Raptor.

[127tolmers]

https://www.investegate.co.uk/foresight ... 5933H3297/

The Board expects to be able to implement a series of further share buybacks to enable the enlarged VCT to achieve its target discount to NAV. It remains the Board's intention subject to cash availability and underlying performance to provide a potential exit event via an additional Tender Offer in summer 2018 on similar terms as in 2017, namely a target discount of 7.5% for up to £5m of shares.

Headway has been made in reducing the discount to NAV during the period under review, with the discount dropping to 10%. However, further progress is required.

Good news from Ixaris , bad news from Datapath and CoGen.

[UncleEbenezer]

Good news from Ixaris , bad news from Datapath and CoGen.

Saw that. Datapath being close to 30% of F4's assets has long been a risk flag. Still, at least it's not a Fin Machine.

Couple of moderately profitable realisations, including The Bunker, which had been a substantial holding for as long as I can remember.

[127tolmers]

KID from F4 now on website.

http://www.foresightgroup.eu/media/5735 ... -final.pdf

Performance scenarios worth reading.

[Kidman]

Has anyone else had a brochure in the post from Rockpool (http://www.rockpool.uk.com)?

They claim to specialise in private company investments and looked quite interesting until I delved further. Their managing partner is a gentleman called Matt Taylor whose claim to fame before setting up Rockpool was his work with Foresight. I quote from LinkedIn:-
"Foresight Group
May 2000 – October 2011 (11 years 6 months)
Played a key role in the ten-fold growth of this private equity and green infrastructure investment management firm. Originated and managed a range of investments, then increasingly focussed on fundraising, promoting Foresight into the VCT Big-5 and closing the firm's first institutional fund of the century."

[naflod]

Hi Kidman

Has anyone else had a brochure in the post from Rockpool (http://www.rockpool.uk.com)?

I have done in the past and had a small nibble last summer. They offer both EIS eligible share investments and loans to the same companies.

I went for one of the loans, which also has some share options attached to make things a little more interesting.

One payment of interest received so far (on time) and a couple of updates on the company that I made the loan to.

The only negative that I have to date is that I am now on my third "relationship partner" in eight months or so.

naflod

[127tolmers]

FRC reprimands and sanctions KPMG over Foresight 4 audits.

https://www.investegate.co.uk/financial ... 11387912P/

The original complaint was submitted in Sept 2017 against KMPG and the directors of F4 and covered the years 2013 - 2017.

It is pleasing that KMPG have finally been reprimanded. However it is disappointing that the main text does not reflect the context to the reading public by making a reference to the £30m errors in reserves of a £50m company and the errors being 30x KPMG's materiality limits. They have also managed to completely miss the central point about illegal dividends by failing to investigate the 2016 accounts.

No mention is made of any sanctions against the directors (FRC has jurisdiction over those who were members of ICAEW) who prepared these incorrect accounts and paid the illegal dividends or whether such enquiries are still ongoing.

Quite bizarrely FRC have just restricted themselves to just FY2013, 2014 and 2015 as being the "relevant period, section 1.2.8" despite being requested to look at FY2016 and FY2017 as well. As a result FRC have completely missed the point about the financial consequences of the understated distributable reserves with respect to Ord and C dividends paid in 2015 and reported in FY2016.

While not directly an issue with KPMG, but as a result of the KPMG approved understatement, the board argued in 2015 they could not pay a larger dividend in Aug 2015 to the F4C shareholders ahead of a planned conversion to F4 Ord shares This cost F4C shareholders several £m, as instead of receiving cash dividends they got F4 Ord shares at NAV that traded at a 30-40% discount. Then, apparently having discovered the error, the board went on to pay an F4 ordinary dividend in Dec 2015 after conversion (using the F4C free cash). This was actually illegal, as although they now had more distributable reserves, they were not sufficient in the audited accounts that had been submitted to Companies House.

As a result of FRC's incorrect definition of the "relevant period", the sanctions in section 6.8 have missed investigating FY 2016 and the legality of the 2015 dividends and the quantum of loss to C shareholders. A pretty poor performance by FRC.

We will have to wait and see what they are doing with directors as FRC are very reticent to discuss their ongoing cases and of course their processes do not allow the complainant sight of a draft final report for comment on substantive errors.

https://www.investegate.co.uk/financial ... 11387912P/

The Financial Reporting Council (FRC) has issued a Final Decision Notice under the Audit Enforcement Procedure and imposed non-financial sanctions on KPMG in relation to the statutory audits of the financial statements of Foresight 4 VCT plc ("the Company") for the 2012/2013, 2013/2014 and 2014/2015 financial years.

The following sanctions have been imposed:

1. A Reprimand; and
2. an order that KPMG monitor compliance with revised audit procedures on company capital and distributions, and report on this to the FRC's Executive Counsel.

KPMG admitted shortcomings in its audits of figures relating to the Company's distributable reserves. These failings may have led to misstatements relating to distributable reserves in the Company's financial statements, which were later restated in 2016 and 2018.

Executive Counsel's determination as to sanctions reflects that:

1. KPMG has taken steps to improve its audit procedures on distributions;
2. The breaches of Relevant Requirements were not intentional, dishonest, deliberate or reckless;
3. There is no suggestion that there were insufficient distributable reserves to cover distributions made by the Company; and
4. The misstated figures for the Company's reserves did not affect the Company's profits or net asset value.

A link to the Final Decision Notice can be found here.

https://www.frc.org.uk/getattachment/a9 ... cation.pdf

[BusyBumbleBee]

Thanks for this Tolmers - very interesting and perceptive of you, Here are some extracts from what you said with my bold

It is pleasing that KMPG have finally been reprimanded. However it is disappointing that the main text does not reflect the context to the reading public by making a reference to the £30m errors in reserves of a £50m company and the errors being 30x KPMG's materiality limits. They have also managed to completely miss the central point about illegal dividends by failing to investigate the 2016 accounts.

Quite bizarrely FRC have just restricted themselves to just FY2013, 2014 and 2015 as being the "relevant period, section 1.2.8" despite being requested to look at FY2016 and FY2017 as well. As a result FRC have completely missed the point about the financial consequences of the understated distributable reserves with respect to Ord and C dividends paid in 2015 and reported in FY2016.

While not directly an issue with KPMG, but as a result of the KPMG approved understatement, the board argued in 2015 they could not pay a larger dividend in Aug 2015 to the F4C shareholders ahead of a planned conversion to F4 Ord shares This cost F4C shareholders several £m, as instead of receiving cash dividends they got F4 Ord shares at NAV that traded at a 30-40% discount. Then, apparently having discovered the error, the board went on to pay an F4 ordinary dividend in Dec 2015 after conversion (using the F4C free cash). This was actually illegal, as although they now had more distributable reserves, they were not sufficient in the audited accounts that had been submitted to Companies House.

As a result of FRC's incorrect definition of the "relevant period", the sanctions in section 6.8 have missed investigating FY 2016 and the legality of the 2015 dividends and the quantum of loss to C shareholders. A pretty poor performance by FRC.

We will have to wait and see what they are doing with directors as FRC are very reticent to discuss their ongoing cases and of course their processes do not allow the complainant sight of a draft final report for comment on substantive errors.

Totally shocking behavior by the board and the auditor and the FRC haven't exactly covered themselves in glory

If HMRC get hold of this - and why wouldn't they - then have they very little option but to withdraw VCT status.?

If that were to happen are the directors liable to pay the losses incurred by the shareholders

[127tolmers]

BBB, there have been previous cases of such illegal dividends being paid by VCTs and indeed by other major listed companies. It usually requires a shareholder GM to regularise. I would not expect VCT status to be at risk.

Timbo's original posting mentions similar events at British Smaller in 2013 and their resolution.

You are correct that there is a theoretical potential directors' liability.

[UncleEbenezer]

BBB, I don't recollect how long you've been with us? Were you around when (some?) Oxford Tech VCTs actually lost VCT status? It was reinstated on appeal after an overhaul in which our timbo and tolmers took starring roles.

[BusyBumbleBee]

BBB, I don't recollect how long you've been with us? Were you around when (some?) Oxford Tech VCTs actually lost VCT status? It was reinstated on appeal after an overhaul in which our timbo and tolmers took starring roles.

Yes - I remember, UncleE : I disembarked from the Ark, and went straight on board the good ship TLF - only jumping ship to this when TLF sank

[timbo003]

It is pleasing that KMPG have finally been reprimanded. However it is disappointing that the main text does not reflect the context to the reading public by making a reference to the £30m errors in reserves of a £50m company and the errors being 30x KPMG's materiality limits. They have also managed to completely miss the central point about illegal dividends by failing to investigate the 2016 accounts.

No mention is made of any sanctions against the directors (FRC has jurisdiction over those who were members of ICAEW) who prepared these incorrect accounts and paid the illegal dividends or whether such enquiries are still ongoing.

Quite bizarrely FRC have just restricted themselves to just FY2013, 2014 and 2015 as being the "relevant period, section 1.2.8" despite being requested to look at FY2016 and FY2017 as well. As a result FRC have completely missed the point about the financial consequences of the understated distributable reserves with respect to Ord and C dividends paid in 2015 and reported in FY2016

It's a bit of a curate's egg, at least FRC have acted on the complaint (I was beginning to think this was another one which was in the too difficult file), but their response is too feeble and they do seem to have missed the main point.

I suspect Foresight management and the Foresight 4 VCT directors saw the writing on the wall a while back

They replaced KPMG as auditors for both their VCTs last year: Foresight VCT (August 2019) and Foresight 4 VCT (Nov 2019)

https://www.investegate.co.uk/foresight ... 0507H0089/
https://www.investegate.co.uk/foresight ... 5449H6404/

As far as I am aware, there was been no comment from anyone at Foresight on what may have been behind the move other than fairly standard bland statements, these statements were from the Foresight annual report (year ending 31st Dec 2019) and the Foresight 4 VCT annual report (6 months ending Sept 30th 2019)

Foresight VCT
The Board launched a tender for its audit contract following the signing of the 2018 Annual Report and Accounts. The previous auditor, KPMG LLP, was invited to tender alongside several other firms. As announced in the Half Yearly Report, following this tender process, Deloitte LLP was appointed as company auditor for the year ending 31 December 2019. The Board is pleased with the appointment but would like to record its thanks to KPMG LLP for its services and advice over the past eight years.

Foresight 4 VCT
The Board regularly reviews the Company’s ongoing costs and launched a tender for it’s audit contract following the signing of the 2019 Annual Report and Accounts. The previous auditor, KPMG LLP, was invited to tender alongside several other firms. Following this competitive tender process, I am pleased to confirm that Deloitte LLP has been appointed as company auditor for the year ending 31 March 2020. The Board would like to thank KPMG for their service over the last eight years. As announced earlier today, KPMG’s section 519 statement will be enclosed with this report.

No acknowledgement that KPMG were asleep at the wheel (along with the Foresight 4 VCT directors)

The Foresight 4 VCT Annual report publishes in July, but I doubt if they will take the opportunity to come clean. It is unfortunate that the AGM this year is likely to be another virtual meeting (in September probably), which will be convenient for them, annoying for us.

[timbo003]

Foresight 4 finals (year ending March 2020) were released yesterday
https://www.investegate.co.uk/foresight ... 5526H5780/

You might have thought the Chairman would take the opportunity to at least mention FRC’s reprimand and sanctions against their erstwhile Auditor KPMG for their failure to pick up on the previous errors in Foresight 4’s accounting (June 12th 2020)
https://www.investegate.co.uk/financial ... 11387912P/

....but no, instead the Chairman decides to give them a pat on the back and thanks them for their services

The Board launched a tender for its audit contract following the signing of the 2019 Annual Report and Accounts. The previous auditor, KPMG LLP, was invited to tender alongside several other firms. As announced in the Half- Yearly Report, following this tender process, Deloitte LLP was appointed as company auditor for the year ended 31 March 2020. The Board is pleased with the appointment but would like to record its thanks to KPMG LLP for its services and advice over the past eight years.

As for the results themselves, there was big tumble in NAV (decrease of 17.7% from 67.8p to 55.8p) . The biggest hit (as expected) was Ixaris (down 62%), although given the nature of the Ixaris business, I was expecting a larger fall.

[UncleEbenezer]

Not to mention:

Five new investments were completed during the year of £7.6 million. Namely:

Fourth Wall Creative Limited (a technology-led sports merchandising business),
Ten Health & Fitness Limited (a group of boutique fitness studios offering physiotherapy, massage therapy and fitness classes).
Roxy Leisure Limited (a games focused bar group)

That's three of the five looking likely casualties of lockdown. Not that we can blame them for that.

[ali1947fish]

hi timbo- hope your'e keeping well-we should get sharesoc to persuade all vcts to stream their presentations. Amati recently excelled in issuing one without any prompting from investors

[UncleEbenezer]

Amati recently excelled in issuing one without any prompting from investors

Did they? I must've missed it. When/where was it announced?