Emv Capital (LSE:EMVC) — Business and Portfolio Update

0:00 Good morning, and welcome to the NET Scientific PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to the management team from NetScientific. Ilian, good morning. Good morning, Ilian. Thank you very much for hosting, and thank you everybody for joining us for this presentation on NetScientific's business and strategy update. So I'll go out a little bit of detail about our strategy for those of you who are seeing us for the first time, but I appreciate many of you have seen us present before. So sorry for the repeat.

0:56 So after that, I'll follow with a high some of the highlights of 2023. I want to emphasize this is not the annual report, so you have to wait for all the detail when that comes out, but we are able to report some positive highlights from last year. I'll also look at some of the portfolio highlights for the year, and I'll close off with a strategy update where we have where we outline a little bit how we have further streamlined our strategy and our plans for the future. So briefly about NetScientific, we are essentially a listed venture capital investment group with a focus on deep tech and life sciences, and we have a international portfolio of companies in a range of sectors. Our strategy is not passive. It is active.

1:44 That's a key differentiator. We identify investing and grow companies in The UK and internationally, but we have a proactive approach in managing that portfolio both by arranging finance for these businesses, investing from our balance sheet, but also applying what we call our value creation services to help those companies grow. From a shareholder perspective, we believe this provides the best of both worlds, both direct equity stakes, but also exposure to carried interest through our syndicated investment practice. What that enables us to do is a capital efficient investment strategy whereby we support our portfolio companies by combining our funds as well as that of third parties, but also being cautious as to when and how much money is being deployed. Quite important in today's market environment.

2:37 Now we offset our running costs through fee based services. Those both come from corporate finance fees charged to our FCA regulated subsidiary, EMV CAPITAL, but also as I flagged by charging for value creation services for the companies that choose to have those. We have a footprint not only in The UK, but also in The US and EU, both in terms of our portfolio companies, but also in terms of our corporate and investor relationships. What that means is that we are able to help our portfolio to scale and internationalize at an early stage. We have a tight but effective board. I'm the CEO of the business. I'm also a significant shareholder of NetScientific. I hold roughly 15%. You could say I'm rather motivated to see the value grow.

3:24 My own background is from technology investments, IP commercialization, and more broadly innovation. The other executive director is my colleague, Ed Cooper, who is both group general counsel and executive director. He's a former partner at a Citi law firm with a strong experience in corporate finance, m and a, IPOs, and other fields. The two known executives are doctor Charles Price, who is an experienced investment banker from the health care industry known by many in the city, as well as doctor Jonathan Robinson, who is an experienced and serial entrepreneur. He's built his own businesses, and we work with him as well quite closely. Steven Crow is a group CFO leading the finance team, and there's a team of roughly 15 people behind behind the scene making all the good stuff happen.

4:14 Now our portfolio at the moment is roughly 23 companies. Within that, we also have MARTHET CAPITAL, which is a Cambridge based early stage VC fund that has a further large portfolio providing early stage deal flow to our group. We haven't had changes to our portfolio last year. Last year was very much reflecting the times, a defensive year, where we were looking at supporting our existing portfolio companies. But as the markets have changed, that is also likely to change for us. So what are the key highlights? Well, we feel that we have done well last year, again, considering the market environment, but also reflecting the growing consolidation and confidence of our business model. We've seen a modest increase in the the fair value of our privately held assets that has been offset somewhat by our one publicly held asset, PDS.

5:07 But across the group portfolio, we have seen roughly £52,000,000 raised through equity and venture debt by 13 of those companies. We feel, again, in the current market conditions, that's a pretty good result. And, again, it shows the strength of our portfolio and its attractiveness in a in in challenging times. We have further increased our capital under advisory. That is the money that we syndicate into into our group under the EMV CAPITAL umbrella, and that has supported our closely held companies through growth and supporting their valuations as the companies continue to grow. In line with our strategy to do selective early divestments, we have made a proprietary trade profit of roughly £500,000 resulting from secondary sales of 1,400,000 across two portfolio companies.

5:57 We feel on a strategic level, that's quite important because it shows our ability to exit companies ahead of a full m and a or an IPO. Quite important in our space to be able to show exit returns. We've seen a significant increase in the fees generated by EMV CAPITAL, which has covered around half of the group's costs. We feel that's a strong result and shows what is possible in this space and most importantly, of course, not having to fundraise from the markets in a different difficult environment. Last but not least, recently, EMV CAPITAL received its direct FCA authorization, and that for us is a really key milestone. It's a validation of our strategy, but also it enhances our brand. And importantly, it enables us to expand and deepen our corporate finance practice as well as to launch our fund management activities.

6:50 And I'll talk about that later on. But all of these provide a very good basis for 2024. You you've seen in previous presentations this slide where I've shown some of our companies going through our value creation process starting from our acquisition of these businesses or stakes in these businesses, rebuild rebuilding their plans, going through various value inflection points, building up the investment readiness through to a fundraise. And this has now there's been significant progress since last year on at least several of those businesses. Ventev, in which we acquired the stake roughly a year ago, has conducted a further fundraise in December, and that locked in a a significant return. It locked in a 14 times return on our initial investment, which we feel is quite good.

7:41 But Deep Tech Recycling, which is a plastic waste management restart that we acquired from the administrator. The company had a really strong history in that space. It has also progressed significantly with money raised and now the company progressing on the first project. I'll talk a little bit more about the portfolio companies, but what I want to showcase here is our process in action that's you know, we're not standing still. We're helping to progress these businesses through the next inflection points and growing thereafter. Now a little bit more about the portfolio companies. Praxis is one of our subsidiaries. When we talk about subsidiaries, really, we're looking at this as portfolio companies in which we happen to have more than 50%. Net Scientific no longer funds these companies from the balance sheet. Therefore, while we consolidate, they're not a burden on our operational cash. So it's a really important point and a big change compared to a few years ago.

8:37 With ProAxis recognizing this the strength and interest in the respiratory diagnostics market, We have strengthened the board with the appointment of Alan Marky as executive chair. He's a medical devices entrepreneur who has exits in this space as well as professor Steven Mint, who is also quite well known in the medical diagnostic circles. With that, we revised the plan. We cut the cash burn of the business and refocused the company on core sales. But also as we flagged in our business update, we have decided to strategically put the company up for sale, building up on the achievements so far, and enabling the company to to get a new home, to max to fully maximize the value of its of its capabilities.

9:30 We expect to have more on that, but in the meantime, the company continues with business as usual, again, maximizing what they already have. GlycoTest is our US based liver cancer diagnostics company in which we own just over 50%. In line with our strategy not to fund companies directly from balance sheet, we secured over the last twelve months both an additional investment from Fosun in line with our original agreements with them, a further 1,000,000, as well as a privately syndicated investment of roughly $800,000 syndicated by EMV CAPITAL. That has enabled the company to continue to grow over the last twelve months. They have completed their enrollment phase of the clinical validation study. And we now believe that glyco test has probably the world's largest biobank of liver cancer diagnostic samples. It is a major achievement for the business, and we believe a value inflection point. They're now positioned to move through the next stages in terms of building up their lab develop test and looking at the market launch.

10:32 PDS Biotech is another well known portfolio company of ours. It's a Nasdaq listed business in the immuno oncology space. They have continued to announce really strong results for their for their clinical program, and they're now in preparation mode for their phase three trials. Now PDS as well as many other biotech companies in The US have been affected by continued volatility in weakness in those markets. The current market cap is in the $150,000,000 range with the daily changes, but we continue to have strong confidence in this business and the next stages that will come with it. Some of our other nonlife sciences and portfolio companies. Qbot is a robotics as a service business that we have taken a deeper stake in.

11:20 The last year, we call it a 3,500,000 fundraise in the business. We have recently strengthened the board with a new chair that will be announced soon that comes from an industrial background as well as the addition of Malcolm Groats as a second investment director of the business. The company has now so far done four and a half thousand installations in The UK and internationally with a very high success rate. They're working with the likes of EON, the French construction conglomerate, and others with a really strong pipeline. So we are quite optimistic for the business going forward. And they have also initiated the internationalization of the business. We flag here the European side, but there's also work ongoing, for potential market entry in The US. SoftFront is an Edinburgh University spinout, one which we've been following and building a stake in for many years. We have we are the largest shareholder in SoftFront when we take into account our capital under advisory.

12:17 The company has made further significant steps last year, and the particularly important one was them signing an advanced purchase order with Inmarsat, which is now part of ViaSat, with ViaSat looking to utilize SoftFront in a number of applications. They've continued their work with the European Space Agency as well as a global aerospace company that's in in confidence. So we're very optimistic about SOFANT. Their technology promises up to 70% energy efficiency compared to other similar solutions in the space. And it's a it's a fast growing market. So you've all seen the importance of Starlink and other such LEO NEO satellite constellations, both from a defense perspective, but also from a civilian perspective. So we feel Softbank is really well positioned for that business.

13:07 Vortex, which is a liquid biopsy company, has continued to develop its offering with a launch in their in the lung London Institute of Cancer in London. And we they have appointed a strong chief technology officer, Paul Reeves, and we we look forward to announcing further news in the in the future. I mentioned our investment in EMVENTIV and the 14 times return we have achieved on on on the on the private on the private side there. The company is further scaling at the moment with further hires, and they're both growing their their ventilation side of the business as well as the heat pump business, which we expect will launch over the next year. I'll I'll also talk a little bit about MARTLET Capital.

13:52 We invested in MARTLET just over two years ago, maybe close to three years ago, and part of the vision there was to build a strong deal flow source in what is arguably one of the world's largest and most concentrated clusters of deep tech and life sciences. Has continued to grow. It has made a number of exciting investments in companies such as NewQuantum, Spotter, Octopipe, and Zampla, and we're working increasingly closely with the team to deepen our relationships and to look at co investment opportunities. So as we look forward, relationships such as those with market will be quite important in delivering to us strong investment opportunities for the scale up stage. I'll now switch a little bit to the future.

14:38 We are a dynamic and agile company. We reflect on our experience, and we reflect what we learn in the market. It's also important to recognize the venture that the venture capital industry itself is in a massive value inflection point. It is not a or a switching point. It is not the first time. This has happened in the past in 2001, then again in 2008. We are going through a similar process right now. We are strong believers in the venture capital industry, but also what we believe is happening is that with the end of a phase in the VC industry, the market trends are coming our way. And what we mean by that is that opportunities in the deep tech space, we believe that the VC industry will increasingly focus on opportunities in our space, in our industries. However, the business models of the VC space have to change, and we believe we are really well positioned with our combination of proactive investment, fund fund management, and value creation services to to utilize these opportunities.

15:37 In line with our view and perspective of the market, we have revised our strategy further. So we have several core planks, if you will, with our strategy. The first one is that we want to and we will continue to grow the value of NetScientific's stakes in the portfolio companies. What that means is, of course, the growth in value of these businesses, but also it means protecting our stake very strongly. So it's capital efficient in these companies, minimizing dilution and active management to protect our stakes while the businesses grow. We also flagged before that we when with the FCA authorization, we now want to progress our fund management practice. What that means is that in addition to the direct investments that Net Scientific is able to make, we expect to launch one or more funds that will provide further scale to our business as well as increased carried interest potential. This is really exciting. It's really taking NetScientific to the next level of growth in this market space, and it positions the company as well for growth.

16:37 It will also provide from a financial perspective significant annual recurring revenues, management fees from these funds, which will increase the stability of the business going forward. However, it's easy to put money in businesses. What about getting money out? We are increasingly focused on not only encouraging our portfolio companies to consider exits, but actually putting infrastructure around that through our value creation services side to help the companies think about exits, prepare for exits, identify the right m and a advisers for them to take them to that stage. So we we've we've flagged the work we're doing with Proaxis on their m and a route, and there are several other companies that we are now in a proactive

17:19 fashion working with to map out their exit strategies in a systematic and a non rushed manner so that we can maximize value from our stakes in those businesses. All of that means that we want to build a resilient and high performance firm. It is not just about the existing portfolio. It is not just about maximizing exit. It is also about building a strong platform with a strong team that can continue to grow and attract interesting deals on the market and to obtain investment returns for our investors. So there's a fair amount of infrastructure work in the in the background that continues to strengthen the resilience of our business and increase the efficiency of operation. And last but not least, all of this in many ways leads towards financial sustainability where we're moving towards covering or perhaps exceeding our core operating costs through the combination of operational income, which comes from corporate finance fees, value creation services fees, and in the future fund management fees, as well as secondary trading income through the profitable exits midway, if you will, before a full exit of some of our portfolio companies.

18:31 We believe all of that means that NetScientific is really well positioned to take advantage of the VC industry shift that we are seeing ourselves right now. There's a lot of opportunities that we are seeing, but we have, in particular, focused on two fund opportunities that we are working in parallel, I flagged the exit opportunities for our portfolio companies. And we believe that all of those actions provide a great opportunity for the markets to align our market cap with the underlying asset value. And I'll stop at that and open up the floor for questions. Ilian, we're going through your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed by our investor dashboard.

19:27 As you can see, we have received a number of questions throughout today's presentation. I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. Okay. Thank you very much. So thank you for your questions. It's a really lovely q and a board, so I'll start from the top. So first question is, what is your view on AI, artificial intelligence, noting that you have said in the past that you do not invest in hype? You're absolutely right. We do not invest in hype. We'd go so far as to say we don't like paying the many price on deals. Where we see opportunities there is look. We do not have the conviction to to invest in big platforms, if you will, that here is a new AI approach that that will transform how AI is done. So we would have absolutely missed open AI. I can tell you that. It's just not what we look for. Where we feel we have a strategic advantage is on looking at the the overlaps of different verticals or horizontals.

20:33 And with respect to AI, where we feel we have an advantage is looking at how AI and big data is applied to the sectors we have a strength in. So we are seeing really exciting applications of AI around medical diagnostics, around improving the efficiency of clinical trials on the life sciences and on the life sciences and biotech side. And on the industrial side, similarly, looking at the uses of AI in improving the efficiency of industrial applications, accelerating renewables, preventative diagnostics around industrial infrastructure, and so on and so forth. So we for us, what's really exciting is seeing these new technology waves as they become applied into market segments, market niches that we know about.

21:22 And another reason to do that is because we know the market leaders in those niches. We know how to speak to them. We're better able to we can add value in those in those spaces. So I'll move to the next question, which is let's answer this one. How will EMV CAPITAL's direct FCI authorization enable expansion, and why have we moved to FCI authorization at this point and not sooner?

21:54 Well so we have been an appointed representative for many years with our very supportive partners, Safar Capital, who if they're on the call, couldn't recommend them more for early stage and growing VC funds that look for incubation support. Now we FCA authorizations simply take a long time. It takes a lot of time for a company to go through the business case. To do that, it is a very serious matter. But, also, I would say the FCA process itself takes a long time, and we it took longer than we expected, which we understand is normal in the industry right now. Now that we have it, it means that we can accelerate, in particular, our fund management practice. There is a number of interesting teams, investment thesis out there with whom we can partner as well as building up our own fund practice.

22:42 I mentioned that there's two specific initiatives that we're working on, and we believe there'll be others. I think looking forward over a couple of years, I think it opens up the opportunity for NetScientific to have a multi fund per topic, if you will, operating structure, partnering with strong, high conviction teams that we know, that we believe in, that we've worked in and provide them with the infrastructure, but also the synergies with the rest of our models. So we believe it provides the best of all worlds option as opposed to a stand alone fund. But, of course, there's many different styles in the industry. The next sorry. And if I can ask Lily to keep keep clicking the ones that have answered this question. How is your invest investing policy evolving, not in the current high concentration?

23:27 What is your midterm and longer term objectives on investment diversification? So I think we've been on a journey. I've I've talked about one aspect where we had inherited subsidiaries, recognizing that we're not an industrial holding company. We are ultimately a VC and working gradually to taking those companies from being subsidiaries to not being subsidiaries, either by growing them with third party funds or indeed by exiting them. So that's one part of the strategy. I think for the existing portfolio, a portfolio of 23 is not small, but it's also not huge. There is a core group of companies that we have where we have double digit stakes. That group is bigger now than it was two years ago. So that has led to some diversification of our options.

24:16 However, in the future, the diversification will come through our growing work with fund management on the fund management practice that I explained and Net Scientific selectively identifying some businesses where it wants to build a deeper stake directly from balance sheet. Again, we believe that that provides for a diversified approach combining the derisking of using third party capital and the scale of it with our own balance sheet. The next question, which is at time of at times a very emotional one for entrepreneurs, what is your view on liquidation preferences and antidilution clauses? I mean, the answer is depends on which side you are of those. But jokes aside, we find ourselves often on the switching point between where EIS money kind of ends and institutional or family office or corporate money comes in.

25:08 A lot of the international money requires pref shares, requires anti dilution elements, but a lot of our partners and co investors from The US world don't like those for for understandable reasons. So I would say that we overall try to be a good citizen in terms of helping the companies evolve the cap structure as the business evolves and the types of investors that come in, avoiding the worst excesses that you can have in the current market environment while also ensuring that investors have an adequate return. We have seen over the last year reflecting the difficulties in the markets, some really toxic instruments, and we stay away from those. We feel those are a win in the short term, but a loss in the long term.

25:56 So, you know, we we try to keep things healthy, if you will. There's a question on Qbot. What are you able to say about the geographical expansion of Qbot? So Qbot's number one priority is to get to breakeven from the in The UK market. The the revenues were, let's say, stable last year. It was a a year of learning. There was a lot of positives, a lot of great customers, but we didn't grow as much as we desired. But we have a really strong pipeline now of roughly £8,000,000 of contracts and a further identified opportunity of 30,000,000 at CubeBot. So, certainly, the company has a good path towards breakeven on the back of The UK practice. Having said that, we have had demand pull from The US and other markets that has meant the company has responded to opportunities with in the industrial participants in those spaces. And while The UK market is large, if you look into The US and European markets, it's order of magnitude larger.

26:53 Now there's many UK companies that have fallen by the wayside because of badly executed US expansion. It's it's a it's a really important thing it's important but dangerous thing to to to try your hand at. So we're taking a very considered approach where we're looking for partners in those territories rather than expanding by by ourselves. Yeah. And we hope that we'll have some progress before the end of the year. A question from Marcus. With regards to the fund management practice, what specific measures are being taken to ensure that the additional annual recurring revenue can petition potential liquidity events?

27:30 So I think it it's almost it goes without saying that, say, a fund management practice comes with annual management fee. It depends on the fund. It depends on the strength of the team, and it depends on the investors what that specific management fee is. That's not meant as a pure upside. It needs to pay for a management team. However, as our business evolves, we believe that this a increasing part of our core operating costs will be covered by such recurring fund management fees, which is good for the business. It means that the health of the business and the stability will will grow with exits providing upside. We feel being part of a fund having access to such funds is good for NetScientific shareholders, including on the liquidity events. It will increase and multiply the liquidity options.

28:24 And, you know, there's only so much we can say right now, but clearly provides small opportunities. A question from Mike. With regards to the investment strategy, life sciences investment timescales and regulatory burden can can be significant compared to other tech sectors. How do you reconcile those risks, and how would you think about the evolution of the portfolio over the next three to five years? So we are very explicitly a deep tech focused investor. And when we say deep tech, it's a broad church with that in that we include life sciences. We include med tech. We include industrials, deep AI, if you will. These are the areas where it's not b to c. It's not fintech. It's not crypto. It's not it's not SaaS. It's areas where there is a high level of IP providing significant levels of barriers to entry.

29:13 Often, there's CapEx requirements, but with our approach, you can satisfy those with a combination of private, public money, and corporate money. We see the regulatory barriers as on the one hand, of course, difficulty takes longer to get to market. But once you are behind those regulatory barriers, it it really increases the value of the business. I'll give you one example. Sage Tech Medical, which is our portfolio company with an aesthetic with an offering for the anesthetic industry, capturing anesthetic gas, which happened to be very bad for the environment similar to the old you had in your fridge, which is now you breathe them. So the EU has just passed some really strong environmental laws, which believes significantly increased the incentive for that knowledge to be adopted. You know? So the current part of regulatory work increases the demand for what our portfolio companies do. You can say the same around energy efficiency and and many other aspects.

30:09 So so I think overall, the regulatory aspect, we think, increases the barriers the barriers to entry in our space, and it makes for more valuable companies. Now in terms of how we reconcile those risks, that that is why I said that doing deep tech investment is different to doing crypto or fintech or SaaS. It's a different thing. We wouldn't be good at SaaS investment or crypto or fintech. We have specialized in this space. So in in many of these areas, we have advisers in those regulatory sectors. We have experience that we draw on. It's part of the road map of these businesses moving forward. In your front of sorry. There were three or four questions in one. The final part of your question, how do we see the evolution of our portfolio over the next three to five years? I think with the fund practice, it means that we'll have a a broader set of bets that we can that we can make.

31:00 And when I say bets, I don't mean a non gam yeah. Non gambling way. We are very, very detailed when we when we make our investment decisions. I would expect the split between life sciences and industrial sustainability to remain roughly fifty fifty. It will go up and down over time. But I expect there'll be a broader spread between the different stages of investment from the early stages feeding the pipeline through to late pre pre IPO, pre m and a stage, a more balanced approach over time. A question by Tom. You mentioned implementing a carried interest scheme to align management interests with shareholders and attract talent. How do you plan to build up such a scheme? So that is under development. We're very much mindful that we are a POC, and we're also very much mindful that we are VC. So we need to cross these two two worlds. It's a considered approach.

31:51 What I will say is that we are in favor of a collegiate approach to such carried interest schemes reflecting that there's no superheroes in our business. Perhaps the superheroes are the guys building the portfolio companies. Rather, it's a team approach in terms of how we add value to these businesses and take them to the next stage. However, we need to attract top talent from from the industry. You know? We are competing with other VCs, and there is a certain way of doing things in the VC space. Equally, we want whatever the outcome is to be in the interest of shareholders and aligned with the shareholders' interests. We will be announcing announcing more detail on that as as as the scheme is further developed and implemented.

32:37 And moving on to the next question by Simon. If glycotest diagnostics if glycotest diagnostic tests are successful, what is timeline to market? Look. The reality with glyco test is that COVID hit the company quite bad. We were able to work through it, but, you know, we lost a considerable period of time because there were simply no clinical trials. The company has now caught up, and we're at the point that we're at a good point now. So in terms of timeline to market, we we anticipate glyco test will will be making a a kind of a broader announcement in the coming months as they consolidate their business plan. But at the moment, we're looking at not earlier than 2025. Okay. I think I've answered all the questions, but please feel free to get in touch with ourselves and our investor relations team.

33:31 And thank you for your support, and looking forward to seeing you at one of the next presentations. Elaine, thank you for answering all those questions you can for investors. And, of course, the company can review all questions submitted today, and we'll publish those responses on the investment company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, can I please just ask you for a few closing comments? For myself, not from the from the viewers. Now look, guys. We we live in really fascinating times. There's a lot of change in industry. And for a number of businesses that's challenging in our space in venture capital, that is where great businesses are born. We are cautiously optimistic. We see a lot of great opportunities on the market. Valuations have become a lot more realistic. So from a acquisition side perspective, it is very exciting. Equally, we need to balance that with the challenges our portfolio companies face in the current funding environment.

34:30 We feel we've built a business model that is right for for today's times. It's not simplistic. There is some complexity in it. I appreciate it. But now over the last three years, we have shown that it works over and over again. So personally, myself, I'm really excited for for for for what is to come. All is full of opportunities, but equally, we need to do this growth in a balanced manner. Hence, this balance between, on the one hand, growth, on the other hand, paying for our bills. So, you know, please follow our LinkedIn. Please also follow the LinkedIn of EMV CAPITAL, which has more frequent updates on nonregulatory updates on the portfolio companies. And once again, I thank you. Thank you for your support. Hey, Liam. Thanks for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

35:25 This may only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of NET Scientific PLC, we'd like to thank you for attending today's presentation, and good morning to you all.