Half Year Results

RNS Number : 4617V
Mercia Asset Management PLC
03 December 2019
 

 

For immediate release

3 December 2019

 

Mercia Asset Management PLC

 

("Mercia", "the Group" or the "Company")

 

Half Year Results

 

Continuing progress across all asset classes

 

Mercia Asset Management PLC (AIM: MERC), the proactive, regionally focused specialist asset manager, today announces its half year results for the six months ended 30 September 2019.

 

Direct investment portfolio highlights

·    £11.1million net invested in 16 portfolio companies during the period (H1 2019: £9.2million invested in 11 portfolio companies), including one new direct investment:

o  £1.1million into Warwick Acoustics to continue its automotive product development

o  £1.5million into Medherant as part of a £2.4million syndicated round

o  £1.8million into Locate Bio as part of a £2.0million syndicated round

o  £2.0million into Voxpopme as part of a £7.5million syndicated round to fund the company's continued overseas expansion

o  £0.5million into Clear Review, a new direct investment focused on the HR technology sector

·    Net fair value increase of £3.2million (H1 2019: £2.6million)

·    Continuing commercial progress made by a number of portfolio companies including nDreams and OXGENE (the new trading name of Oxford Genetics)

 

Managed funds' developments

·    Third-party funds under management ("FuM") totalling £361.3million (H1 2019: £394.9million) of which:

o  Venture capital FuM £209.6million

o  Private equity FuM £60.4million

o  Debt FuM £91.3million

 

Financial highlights

·    Revenue increased 5.1% to £5.5million (H1 2019: £5.3million)

·    Net expenses £0.9million (H1 2019: £0.7million)

·    Operating profit £1.9million (H1 2019: £1.8million)

·    Profit after tax £2.1million (H1 2019: £1.9million)

·      Earnings per share 0.69 pence (H1 2019: 0.64 pence)

·    Direct investment portfolio fair value increased to £102.0million (H1 2019: £77.8million)

·    Unrestricted cash and short-term liquidity investments of £17.8million (H1 2019: £38.3million)

·    Net assets £128.4million (H1 2019: £125.2million)

·    Net assets per share 42.3 pence (H1 2019: 41.3 pence)

 

Mark Payton, Chief Executive Officer of Mercia, commented:

 

"We are six months into our three-year plan to double assets under management, move the Group to a profitable trading position and evergreen our balance sheet. We expect that this will be achieved through both organic growth and selective acquisitions. I am pleased to say that we have made a solid start to the year, demonstrating our ability to deliver for all our stakeholders. We have strong liquidity across our managed funds and a maturing balance sheet investment portfolio which is now attracting increasing third-party syndication, particularly from venture capital trusts. Mercia is now a highly differentiated Group which is poised for further growth. We remain confident in our ability to deliver strong returns for shareholders and fund investors alike over the near to medium-term."

 

 

 

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

 

Enquiries:

 

Mercia Asset Management PLC

Mark Payton, Chief Executive Officer

Martin Glanfield, Chief Financial Officer

www.mercia.co.uk   

 

+44 (0)330 223 1430

 

Canaccord Genuity Limited (NOMAD and Joint Broker)

+44 (0)20 7523 8000

Simon Bridges, David Tyrrell

 

 

 

N+1 Singer (Joint Broker)

 

Harry Gooden, Peter Steel, James Moat

+44 (0)20 7496 3000

 

 

Buchanan (Investor Relations Adviser)

+44 (0)20 7466 5000

Chris Lane, Vicky Hayns, Stephanie Watson

 

www.buchanan.uk.com

 

 

 

 

Analyst and investor briefing

Management will be hosting a live audio webcast and Q&A at 3.00pm on Tuesday 3 December 2019. To participate please register using the following link and dial-in details.

 

Audio webcast:

https://webcasting.buchanan.uk.com/broadcast/5de4f42dcdd378185e2a3a89

 

Conference call:

                                UK Toll-Free:  0800 358 9473

                                UK:  +44 3333 000 804

                                PIN:  14639475#

 

A copy of the results presentation is available on the Company's website: www.mercia.co.uk and a recording of the audio webcast will be made available later today.

 

About Mercia Asset Management PLC

 

Mercia is a proactive, specialist asset manager focused on supporting regional SMEs to achieve their growth aspirations. Mercia provides capital across its four asset classes of proprietary balance sheet capital, venture capital, private equity and debt; the Group's 'Complete Capital Solution'. The Group initially nurtures businesses via its third-party funds under management then, over time, Mercia can provide further funding to the most promising companies by deploying direct investment follow-on capital from its own balance sheet.

 

The Group has a strong UK regional footprint through its eight offices, 19 university partnerships and extensive personal networks, providing it with access to high-quality deal flow. Mercia has c.£500million of assets under management and, since its IPO in December 2014, has invested over £90million across its direct investment portfolio.

 

Mercia Asset Management PLC is quoted on AIM with the epic "MERC".

 

 

Chief Executive's review

For the six months to 30 September 2019 I am happy to report continuing positive progress across all four asset classes. Our focused and balanced approach is driving momentum to deliver on our three-year strategy to double assets under management ("AuM"), move the Group to a profitable trading position and evergreen our balance sheet through the selective use of our proprietary capital.

 

Our objectives remain the same: sourcing compelling deal flow in a competitive market; achieving fair value increases in our portfolio of direct investments, through the commercial progress of those businesses together with syndicated follow-on investment rounds; generating direct investment cash realisations and minimising net asset value ("NAV") erosion through a continued focus on minimising net expenses.

 

We are developing a high-quality direct investment portfolio with strong underlying growth in investee company revenues and milestone attainment, which continue to underpin our fair value assessments.

 

Revenue increased 5.1% to £5.5million (H1 2019: £5.3million). During the period, Mercia invested c.£46million across all four asset classes attracting an additional c.£47million in co-investment. Of that total, £11.1million net was invested into the direct investment portfolio.

 

We currently manage c.£500million of AuM comprising third-party funds under management ("FuM") and proprietary balance sheet capital. Our managed funds are principally closed-end 10-year funds with long-term predictable fee income. Our strategy is to grow our specialist asset management activities to deliver shareholder value by providing a capital growth opportunity through a profitable Group, via its FuM and the growing value of its proprietary balance sheet capital activities. We seek to achieve this through our expertise in investing across this capital structure. We combine flexible capital solutions, local access and insight, with an entrepreneurial approach, to give us a competitive edge in our regional markets. With a clear understanding of our target markets, we operate across four distinct specialist asset classes, our proprietary balance sheet capital, venture capital ("VC"), private equity ("PE") and debt, to help selectively scale businesses from our equity and lending activities.

 

Markets

We use our debt funds to back profitable regional businesses that typically seek £0.2million to £1.0million and where appropriate, we can invest alongside our PE funds. For the latter, we back profitable businesses via one-off transactions that will drive operational improvements in those businesses. Transaction sizes are in the c.£2million to c.£5million range. For our VC funds, we typically invest up to c.£2million in businesses that require less than £10.0million from Mercia across our VC and balance sheet asset classes, over their growth cycle. Our proprietary balance sheet capital is used exclusively to provide scale-up capital to companies within our managed funds. Many of our equity investments are realised through trade sales and secondary transactions. Industry statistics published by the British Private Equity & Venture Capital Association ("BVCA") (the Performance Measurement Survey 2017) illustrate that the 10-year out turn for PE and VC funds in the small-end of the market in which we operate was 15.3% IRR and 6.6% IRR respectively. We estimate that c.£1billion is invested per annum in our target markets. In the last full financial year we secured c.6% of this total addressable market opportunity and believe that we can materially build our market share in the near term. Our target IRR for all we do in equity is 15%. Based on historic performance, our oldest PE and VC funds are meeting this target at IRRs of 19% and 15% respectively. Our balance sheet, which is much younger than the 10-year VC fund out turns described above, has a current IRR of c.14%, with the average holding period of our investment being 2.5 years.

 

A differentiated operation

Our capital structure, market focus and internal Platform are targeted at what we believe are four critical success factors, being an ability to (i) invest through economic and business cycles, (ii) pick well, (iii) buy well and (iv) exit well. Mercia's Platform is a central resource exclusively available for our c.320 portfolio companies and comprises (a) corporate advisory (focused on building investor syndications), (b) in-house legal, (c) in-house research and (d) portfolio human resourcing. This value-added team has the potential to greatly enhance the performance of our portfolio.

 

Assets under management

During the period we invested c.£46million across all four asset classes, of which c.£29million was into 30 new businesses and c.£17million was follow-on investment into 39 existing portfolio companies. Alongside this investment, Mercia attracted an additional c.£47million in co-investment.

 

Our flexible fund mandates allow us to be patient and selective. We remain focused on investing in the highest quadrant of businesses where we can provide support in achieving the commercial drivers of value creation.

 

Proprietary balance sheet capital

The balance sheet portfolio contains 22 investments with a holding value of £0.5million or more, including one new investment during the period, being £0.5million into Clear Review. All direct investments have originated from our managed funds' portfolio. The direct investment portfolio continues to grow in both strength and depth. During the six-month period under review, £11.1million net was invested into 16 companies and there was a net fair value increase of £3.2million.

 

Third-party fund management

Mercia now benefits from c.£361million of third-party FuM with c.£147million of uninvested cash. A majority of Mercia's managed funds are fixed-life 10-year funds, extendable for two-year periods thereafter. Over 80% of Mercia's revenue is contracted year-on-year with 56% of its managed funds, by value, being less than three years old. There are 331 companies held across Mercia's third-party FuM.

 

Venture

Mercia has c.£210million in FuM for VC investment activities, with approximately £69million of free cash. Mercia supported 33 businesses during the period investing £18.6million (£11.8million in new portfolio and £6.8million as follow-on investing). There are currently 194 businesses within the venture portfolio.

 

Private equity 

Mercia has c.£60million in FuM for PE investment activities, with approximately £26million of available cash to invest. The Group invested £9.5million in total during the period and there are 17 businesses within the PE portfolio.

 

Debt

Mercia has c.£91million in FuM for its debt activities, with approximately c.£52million of available funds to lend. The Group supported 26 businesses during the period, lending £7.2million in total. There are currently 120 businesses within the debt portfolio.

 

Financial performance

Revenues met expectations, growing by 5.1% to £5.5million (H1 2019: £5.3million). The direct investment portfolio increased in value by 16.4% in the period to £102.0million. This increase in value included net direct investments totalling £11.1million and net unrealised fair value gains of £3.2million. The Group has adopted the new International Private Equity and Venture Capital Valuation Guidelines in the valuation of its direct investment portfolio at the period end. Net asset value ("NAV") per share was 42.3 pence (H1 2019: 41.3 pence).

 

Outlook

To remain competitive, we must continue to unearth attractive deals, buy well, support management teams' growth ambitions and ultimately exit well. We believe our proactive approach, combined with our focus on businesses with modest capital needs, sourced predominantly from the UK regions, provides Mercia with a sustainable advantage.

 

For a shareholder in Mercia or an investor in one of our many managed funds, we believe this access to alternative asset classes, managed by Mercia, provides the potential of medium to long-term returns. We remain focused on organically building out our existing asset class strategies, whilst carefully evaluating periodic acquisitions to accelerate the Group's growth ambitions. We will continue to use our balance sheet capital to enable the growth of our specialist asset management capabilities. The long-term fees generated from our private closed-end funds continue to underpin our future revenue growth.

 

The Group's Board and senior management team own c.23% of the Group's issued share capital. This degree of ownership, by those responsible for the successful execution of the Group's strategy, underpins the alignment of all key stakeholder interests.

 

We remain optimistic in our ability to double AuM, move the Group to a profitable trading position and evergreen the balance sheet, and in so doing deliver strong returns for shareholders and fund investors alike in the near to medium term.

 

 

Dr Mark Payton

Chief Executive Officer

 

Chief Investment Officer's review

We recognise that our four discrete asset classes - proprietary balance sheet capital, venture capital, private equity and debt - each play an essential role in the complete, connected, capital solution that we offer to regional businesses. We have distinct investment teams who are specialists with a clear understanding of the target markets in each region and are able to source attractive deal flow in a competitive market. In many cases, investment opportunities overlap, and our funding capabilities complement each other. A demonstration of this is our managed fund portfolio company, Total Resources, a high-growth traffic management business located in the North East of England. We deployed loan capital from our SME Loans' fund and North East Venture fund, in addition to equity capital from our current PE fund in a seamless c.£10million funding package for the company.

 

We continue to access some of the most exciting regional investment opportunities using our growing networks developed by 55 investment professionals on the ground across the Midlands, the North of England and Scotland. Our sustained efforts are moving us increasingly towards becoming a profitable specialist asset manager.

 

Our Platform is now fully operational and is starting to help create significant value. Through a program of events, we have developed strong and respected relationships with successful entrepreneurs, opinion leaders and partners from the regions, who have helped drive deal origination and shape post-investment management teams.

 

Our Platform has been increasingly successful in delivering a range of cohesive and orchestrated value-add services to our portfolio businesses. Our in-house talent management team provides access to seasoned, relevant industry experts and non-executive directors who help us assess new opportunities, win mandates and guide our investee companies towards quality decision-making and conversations that better inform strategy. During the period under review, we assisted 22 portfolio companies to scope key roles and placed 21 new non-executive directors.

 

The corporate advisory team manages deal syndication alongside the Group's proprietary balance sheet capital, bringing together investors to back our companies. During the period under review, we made 22 introductions across the Group and were instrumental in completing the recently announced new £10.0million funding round for Sense Biodetection. In addition, we offer legal investment documentation expertise, as well as research for the benefit of Mercia and our portfolio companies. We firmly believe that our continued investment in these activities will help our portfolio companies to realise their full value potential.

 

Direct investment portfolio review

Our direct investment portfolio is making good progress. We invested £11.1million net in the period in our portfolio across 15 existing companies and added one new investment, Clear Review. Mercia's Enterprise Investment Scheme ("EIS") funds first invested in Clear Review in 2017 and the company has since made excellent commercial progress. A fast-growing software-as-a-service ("SaaS") business focusing on human relations management tools, Clear Review has doubled in size since our first managed fund investment and attracted Albion as a co-investor with us in June of this year.

 

We currently have 23 companies in the direct investment portfolio. Our largest investment, nDreams, accounts for c.15% of the total portfolio and the top five by value account for c.49% of the total portfolio. There is a broadly even split across our four sectors of Software & the Internet; Digital & Digital Entertainment; Electronics, Materials, Manufacturing/Engineering and Life Sciences & Biosciences.

 

We believe that the portfolio is well balanced and we would like to increase the number of investee companies to 30-35 across a range of businesses at different stages of maturity.

 

Within the Software & the Internet portfolio, Intechnica announced a substantial deal with a leading national retailer, Intelligent Positioning and Voxpopme continue to demonstrate impressive revenue growth, with Voxpopme also securing a significant new funding round with both UK and US-based co-investors. Within Life Sciences & Biosciences, OXGENE (the new trading name of Oxford Genetics) announced that it had augmented its relationship with one of the world's leading global life science companies, The Native Antigen Company continued its profitable growth path and we made a significant further investment, following continued technical progress, in Locate Bio, which was a new investment in the last financial year. Within Electronics, Materials, Manufacturing/Engineering, we invested further capital in all five of our direct portfolio companies in support of their continued commercial and technological progress. Within Digital & Digital Entertainment, we were excited about the reception for Phantom, nDream's latest virtual reality ("VR") game, the deepening Oculus Studio relationship and the additional contracts announced after the period end. Soccer Manager continues to grow its revenues from its mature games and it also invested during the period in developing three new games.

 

As at 30 September 2019, the direct investment portfolio was held at a fair value of £102.0million, an increase of 16.4% from £87.7million as at 1 April 2019. The increase in value included net direct investments totalling £11.1million and net upward fair value movements of £3.2million.

 

The £3.2million net upward fair value movements comprised £4.7million of fair value gains, reflecting uplifts for OXGENE, Intechnica and Crowd Reactive, based upon third-party indications of market value, an uplift for Voxpopme, following a successful £7.5million syndicated third-party investment round, and a small uplift for Soccer Manager. Downward fair value movements totalled £1.5million, the largest being £1.0million due to a fall in the share price of AIM-listed Concepta PLC, despite continuing commercial progress and a successful placing.

 

Commercial progress across the Group's top five direct investments is discussed in more detail below. 

 

nDreams

As at 30 September 2019, Mercia held a 37.1% fully diluted interest in nDreams at a fair value of £15.1million (H1 2019: £13.0million). Mercia first invested in the business in March 2014 through its managed funds before making its first direct balance sheet investment in December 2014. The investment is held at the price of the most recent equity investment round.

 

nDreams provides creative content for the interactive VR entertainment market, developing and publishing games and experiences on VR devices. Following the unveiling of its Phantom game developed for the new Oculus Quest headset at industry trade show E3 in June and the subsequent positive reception it received, winning seven awards, it is seeing significant inbound approaches from both publishers and hardware companies to develop new VR content.

 

OXGENE (the new trading name of Oxford Genetics)

As at 30 September 2019, Mercia held a 30.2% fully diluted interest in OXGENE at a fair value of £11.7million (H1 2019: £9.1million). Mercia first invested in the business in July 2013 through its managed funds before making its first direct balance sheet investment in December 2015. The investment is held at an enterprise value based on a recent third-party valuation.

 

OXGENE operates in the synthetic biology market providing world-leading technologies and advanced techniques for drug and gene therapy development. The world's first biologic, insulin, was brought to the market in the early 1980s and today approximately 20% of all treatments are biologics, with over a quarter of new therapeutics approved in the US in 2017 being biologics. This demonstrates the highly progressive nature of this expanding sector. In September 2019, the company announced that it had augmented its relationship with one of the world's leading global life science companies, Abcam plc. This expanded agreement, which follows an earlier deal announced in August 2018, will see OXGENE deliver at least 1,000 engineered cell lines over the next three years to support Abcam in its delivery of highly validated biological binders and assays and to expand its catalogue of off-the-shelf edited cell lines.

 

Warwick Acoustics 

As at 30 September 2019, Mercia held a 52.9% fully diluted interest in Warwick Acoustics at a fair value of £9.0million (H1 2019: £7.2million). A long-term portfolio business, Mercia first invested in Warwick Acoustics in January 2013 through its managed funds before making its first direct balance sheet investment in December 2014. The investment is held at the price of the most recent equity investment round.

 

Warwick Acoustics continues to pursue its goal of disrupting the $8.0billion automotive audio market. Its latest flagship premium headphone product, the APERIO, has received critical acclaim, making the front cover of HiFi+ magazine and HiFi News, winning two 'Outstanding Product Awards' and being described by the reviewer as "the best headphone system I have ever heard". Continued brand development is translating into early orders for the product, as well as growing momentum with its automotive proposition. In addition to signing its first two design and development contracts with a major premium European car manufacturer, the company has a growing pipeline of paid for proof-of-concept opportunities with a range of global manufacturers. These companies are seeking to confirm not just its audio credentials but also its potential for weight, space and cost saving within a CO2 emissions regulatory environment, that is increasingly challenging for the industry. Success with these projects should result in the company securing 'supplier ready' status with the automotive industry within the next 12 months. 

 

Intechnica

As at 30 September 2019, Mercia held a 27.5% fully diluted interest in Intechnica at a fair value of £7.2million (H1 2019: £4.7million). Mercia had previously supported the business through its managed fund, the North West Fund for Venture Capital, for four years before making its first direct balance sheet investment in April 2017. The investment is held at an enterprise value based on a third-party valuation.

 

Intechnica is an established Manchester-based business which provides scalable software solutions for the management of high and variable website traffic demand, via its SaaS-based product Netacea and its specialist IT and technology consulting services. Intechnica has signed contracts with several global brands for its virtual waiting room product which manages website traffic and resource optimisation, and its bot management and account takeover prevention solution. The business has run-rate revenues of c.£8million and in the last 12 months, Mercia has supported the business in building out its senior team to further develop Netacea, operating in a market estimated by Gartner to grow to c.$427billion in 2019.

 

Voxpopme

As at 30 September 2019, Mercia held a 17.1% fully diluted interest in Voxpopme at a fair value of £7.0million (H1 2019: £3.0million). Mercia first invested in the business in October 2017 through its managed funds before making its first direct balance sheet investment in March 2018. The investment is held at the price of the most recent equity investment round.

 

Voxpopme is a Birmingham-based video insights platform that provides innovative instant feedback and video analytics for the market research and customer experience ("CX") markets. Since the start of 2019, the business has focused on its transition to a full SaaS business model, with great success.  Its new operating plan has been instrumental in winning important new clients such as Mondelez, Dyson, AirBnB and Colgate, as well as setting the foundation for a faster rollout into the CX market. Channel partner relationships, to drive further growth in this space in 2020, are also being developed with Qualtrics and Medallia.

 

The business has recently closed a £7.5million funding round, which included new investors NVM Private Equity and US-based investor, Origin Ventures, alongside a further £2.0million investment from Mercia. The new investment will support the company's ambitious growth plans through 2020 and beyond, underpinning Mercia's current valuation.

 

Venture capital funds

Our VC activities include managing three regionally focused 10-year LP funds. These include the £58.7million Northern Powerhouse Investment Fund ("NPIF"), the £27.6million North East Venture Fund ("NEVF") and the £23.5million Midlands Engine Investment Fund Proof of Concept Fund ("MEIF"). 

 

These funds are all performing well against their mandates, with £18.6million invested in the period and c.£69million of liquidity still to invest as at 30 September 2019.

 

We also raise and manage several EIS funds each year, which we invest across the UK regions with a focus on Scotland and our 19 universities, and have invested £4.1million during the period.

 

Our VC funds hold 194 investments, ranging from the earliest start-ups such as C7 in MEIF, which has now grown to revenues of over c.£8million having made a recent acquisition, to Azzure IT in NPIF, which now has revenues of over c.£6million, and Total Resources in NEVF, which was Mercia's largest ever transaction, involving four different funds and has revenues of c.£9million. Sense Biodetection, in our EIS funds, has just completed a £10.0million syndicated funding round and we have exited from North West Fund portfolio company, Applearn, generating a 2.4x return. Companies like these, and many others, provide us with a strong funnel of opportunities for our proprietary balance sheet capital.

 

Private equity funds

During the six months under review we invested £9.5million from our PE funds. Two significant investments were Total Resources, a temporary traffic management business, where our PE funds invested £5.8million in a c.£8million transaction which also included both our SME Loans fund and NEVF, and Shoppertainment, a cash out transaction, which also included an investment from the SME Loans fund, alongside £3.8million from our current PE fund. Both transactions clearly demonstrate Mercia's ability to deploy complete, connected capital. Our legacy PE portfolio is maturing in line with our projections and we expect several further exits in the short term.

 

Although our work in progress remains strong, we are seeing a slowing down of adviser-led deal flow from the market. Mercia's value origination proposition within the regions, utilising our extensive regional networks, is providing resilience in tougher economic circumstances. Our PE funds have approximately £26million of free cash to invest over the next three to five years, so are very well placed to take advantage of investment opportunities that may result.

 

Debt funds

We have been active in our continuing management of two third-party debt mandates; the £40.0million EV SME Loans fund backed by Greater Manchester Pension Fund and Santander, and the £51.0million NPIF Debt fund (part of Mercia's £110.0million NPIF allocation) focusing on Yorkshire and the Humber. We have advanced loans totalling £7.2million to 26 businesses in the six months to 30 September 2019 and have approximately £52million of available funds to lend as at the period end.

 

The local expertise and experience of our proven debt team enables Mercia to continue to source and support established and profitable SMEs that can demonstrate growth and an ability to service the requested levels of debt.

 

Post period end developments

Investment activities have continued apace since the period end across all four of our asset classes, in particular with the announcement by nDreams of a further significant development contract.

 

Mercia has a robust liquidity position and anticipates growth in capital deployment from both balance sheet and managed funds to drive continued investment for the benefit of all shareholders and fund stakeholders. Delivering growth through investment excellence remains our priority and we look to achieve this through our regionally active and focused approach, building relationships with our portfolio management teams to generate superior returns.

 

Julian Viggars

Chief Investment Officer

Chief Financial Officer's review

Mercia's development as a leading, regionally focused specialist asset manager has continued during the period under review. This development has encompassed both further positive overall progress by the Group's direct investment portfolio as well as building out the Group's fund investment and support capability in each of its target regions of the Midlands, the North of England and Scotland.

 

Revenue (which excludes unrealised fair value movements) increased 5.1% to £5.5million (H1 2019: £5.3million). The Group's revenue increase was due to higher initial management fees from the Group's investment activities and higher businesses services income from the provision of legal services via Mercia's Platform to portfolio companies.

 

Staff and administrative expenses increased by 7.5% to £6.4million (H1 2019: £6.0million). The overall increase in the Group's cost base arose from a net increase in staff, including the first full six months' costs of Mercia's Platform, as well as higher costs associated with the Group's growing Enterprise Investment Scheme ("EIS") funds under management.

 

Net expenses therefore increased by £0.2million compared with the corresponding period, primarily as a result of average headcount increasing from 85 to 90 staff. Having largely built Mercia's operating model, the Group now anticipates a slowing of the rate in increase of its cost base.

 

During the six months ended 30 September 2019 the Group invested £11.1million net (H1 2019: £9.2million) in 15 existing and one new direct investment (H1 2019: 10 and one respectively). Since the period end the Group has invested a further £1.9million (H1 2019: £2.8million). The investment momentum seen in the first half of the financial year is expected to slow in the second half, as an increasing number of third parties wish to invest in the direct investment portfolio.

 

Net fair value increases during the period totalled £3.2million (H1 2019: £2.6million) and as at 30 September 2019 the fair value of the Group's direct investment portfolio reached an important milestone as it exceeded £100.0million for the first time at £102.0million (H1 2019: £77.8million). Net assets at the period end were £128.4million (H1 2019: £125.2million) resulting in an increase in net assets per share (being net assets of £128.4million divided by 303,309,707 shares in issue) to 42.3 pence (H1 2019: 41.3 pence (being net assets of £125.2million divided by 303,309,707 shares in issue)).

                                                                                                                                                                

Within total net assets, cash and short-term deposits totalled £18.2million (H1 2019: £39.1million), including £0.4million of cash held on behalf of third-party EIS investors (H1 2019: £0.8million).

 

The net fair value increases contributed favourably to result in a consolidated total comprehensive profit for the period of £2.1million (H1 2019: £1.9million) resulting in earnings per Ordinary share of 0.69 pence (H1 2019: 0.64 pence).

 

Alternative performance measures

The Group believes that the measurement and reporting of both 'net expenses' and 'net asset value per share' are important alternative performance measures of interest to investors. The reporting of net expenses enables a clear understanding of the impact of the Group's operating model on net asset value erosion, where operating costs exceed revenue. Similarly, the reporting of net asset value per share provides a clear indicator of the overall progress that the Group is making in terms of shareholder value creation over the medium term. Where there is a difference between net asset value per share and the Group's share price, that difference represents either a discount or premium to Mercia's net asset value.

 

Summarised condensed consolidated statement of comprehensive income

 

 

Six months

ended

30 September

2019

£'000

Six months

ended

30 September

2018

£'000

Year

ended

31 March

2019

£'000

Revenue

5,537

5,270

10,675

Other administrative expenses

(6,401)

(5,956)

(12,115)

Net expenses

(864)

(686)

(1,440)

Fair value movements in investments

3,237

2,601

3,916

Share-based payments (charge)/credit

(281)

32

(171)

Amortisation of intangible assets

(150)

(150)

(301)

Operating profit

1,942

1,797

2,004

Finance income

122

106

562

Taxation

27

27

54

Profit and total comprehensive income for the financial period

2,091

1,930

2,620

Basic and diluted earnings per Ordinary share (pence)

0.69

0.64

0.86

 

Revenue

Total revenue of £5,537,000 (H1 2019: £5,270,000) comprised fund management fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income.

 

Other administrative expenses

Total other administrative expenses of £6,401,000 (H1 2019: £5,956,000) consisted predominantly of all staff-related and office, marketing and professional adviser costs.

 

Net expenses

Net expenses of £864,000 (H1 2019: £686,000) represent total revenue less all staff and administrative expenses.

 

Fair value movements in investments

 

Six months

ended

30 September

2019

£'000

Six months

ended

30 September

2018

£'000

Year

ended

31 March

2019

£'000

Investment movements excluding cash invested and realisations:

Unrealised gains on the revaluation of investments

4,758

3,189

8,622

Unrealised losses on the revaluation of investments

(1,521)

(588)

(4,706)

Net fair value gain

3,237

2,601

3,916

 

For the six months ended 30 September 2019, unrealised fair value gains arose in five (H1 2019: four) out of the Group's 25 (H1 2019: 26) direct investments. The largest fair value gain was Voxpopme, which accounted for £2,015,000 of the total. There were three (H1 2019: two) fair value decreases, the largest being Concepta PLC for £993,000, which arose from a fall in its share price during the period, despite continuing commercial progress and a successful placing.

 

Share-based payments charge

The £281,000 non-cash charge (H1 2019: £32,000 credit) arises from the net increase in the total number of issued share options held by employees throughout the Group, ranging from the date of Mercia's IPO in December 2014 to 30 September 2019.

 

Amortisation of intangible assets

The amortisation charge of £150,000 (H1 2019: £150,000) represents amortisation of the acquired intangible assets of Enterprise Ventures Group Limited ("Enterprise Ventures") for the six-month period under review.

 

Finance income

Finance income of £122,000 (H1 2019: £106,000) largely comprised interest receivable arising from the Group's cash and short-term liquidity investments.

 

Balance sheet and cash flows

Net assets at the period end of £128,437,000 (H1 2019: £125,172,000) were predominantly made up of the Group's direct investment portfolio, together with cash and short-term liquidity investments. The Group continues to have limited working capital needs due to the nature of its business.

 

Direct investment portfolio

During the six months under review, Mercia's direct investment portfolio grew from £87,659,000 (H1 2019: £66,070,000) to £102,021,000 (H1 2019: £77,827,000). The table below lists the Group's top 20 direct investments by value as at 30 September 2019, including a breakdown of the net cash invested during the period, net fair value movements for the period and the fully diluted equity percentage of each company owned. At the period end, the Group's top 20 direct investments represented 97.5% of the total direct investment portfolio value (H1 2019: 98.7%).

 

 

 

 

 

 

 

 

Net

investment

value

As at

1 April

2019

£'000

 

Net cash

invested

Six months to

30 September

2019

£'000

 

Fair value

movement

Six months to

30 September

2019

£'000

Net

investment

value

As at

30 September

2019

£'000

 

Percentage

held

As at

30 September

2019

%

nDreams Ltd

15,120

-

-

15,120

37.1

Oxford Genetics Ltd t/a OXGENE

10,161

-

1,582

11,743

30.2

Warwick Acoustics Ltd

7,904

1,065

-

8,969

52.9

Intechnica Ltd

6,677

-

509

7,186

27.5

Voxpopme Ltd

3,026

2,000

2,015

7,041

17.1

Medherant Ltd

5,205

1,500

-

6,705

31.1

Impression Technologies Ltd

5,381

600

-

5,981

31.5

Ton UK Ltd t/a Intelligent Positioning

5,473

250

-

5,723

28.2

VirtTrade Ltd t/a Avid Games

3,938

400

-

4,338

28.1

Faradion Ltd

3,525

500

-

4,025

16.4

The Native Antigen Company Ltd

2,863

-

(184)

2,679

30.6

Soccer Manager Ltd

2,099

300

135

2,534

34.8

Crowd Reactive Ltd

1,589

214

517

2,320

22.6

Edge Case Games Ltd

2,300

-

-

2,300

21.2

Locate Bio Ltd

500

1,750

-

2,250

17.4

PsiOxus Therapeutics Ltd

2,377

160

(344)

2,193

1.5

sureCore Ltd

1,834

333

-

2,167

22.0

LM Technologies Ltd

1,913

250

-

2,163

39.4

Eyoto Group Ltd

1,755

250

-

2,005

15.7

W2 Global Data Solutions Ltd

2,000

-

-

2,000

15.2

Other direct investments

2,019

1,553

(993)

2,579

n/a

Totals

87,659

11,125

3,237

102,021

n/a

 

Cash and short-term liquidity investments

At the period end, Mercia had total cash and short-term liquidity investments of £18,186,000 (H1 2019: £39,049,000) comprising cash of £17,979,000 (H1 2019: £28,900,000) and short-term liquidity investments (being cash on deposit with maturities between three and six months) of £207,000 (H1 2019: £10,149,000). Cash included £437,000 (H1 2019: £768,000) held on behalf of third-party EIS investors. The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment and trading purposes, not yield. At the period end the Group's cash and short-term liquidity investments were spread across five leading United Kingdom banks.

 

The summarised movement in the Group's cash position during the six months ended 30 September 2019 is shown below.

 

 

 

Six months

ended

30 September

2019

£'000

Six months

ended

30 September

2018

£'000

Year

ended

31 March

2019

£'000

Opening cash and short-term liquidity investments

30,398

52,908

52,908

Net cash used in operating activities

(1,121)

(4,585)

(5,080)

Net cash used in direct and other investing activities

(11,010)

(9,078)

(17,234)

Net cash used in financing activities

(81)

(196)

(196)

Period end cash and short-term liquidity investments

18,186

39,049

30,398

 

The continuing overall positive progress of the direct investment portfolio, together with the Group's cash reserves, provides Mercia Asset Management with a strong base from which to continue to grow NAV per share. Whilst maintaining a constant focus on net expense minimisation, the building out of the Group's regional presence and wide-ranging investment capability will enable Mercia to target significantly increasing its assets under management as it strives to reach trading profitability.

 

 

Martin Glanfield

Chief Financial Officer

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2019

 

 

 

 

 

 

 

Note

Unaudited

Six months

ended

30 September

2019

£'000

Unaudited

Six months

ended

30 September

2018

£'000

Audited

Year

ended

31 March

2019

£'000

Revenue

2

5,537

5,270

10,675

Other administrative expenses

 

(6,401)

(5,956)

(12,115)

Net expenses

 

(864)

(686)

(1,440)

Fair value movements in investments

3

3,237

2,601

3,916

Share-based payments (charge)/credit

 

(281)

32

(171)

Amortisation of intangible assets

 

(150)

(150)

(301)

Operating profit

 

1,942

1,797

2,004

Finance income

 

122

106

562

Profit before taxation

 

2,064

1,903

2,566

Taxation

 

27

27

54

Profit and total comprehensive income for the financial period

 

2,091

1,930

2,620

Basic and diluted earnings per Ordinary share (pence)

4

0.69

0.64

0.86

 

 

All results derive from continuing operations.

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Condensed consolidated balance sheet

As at 30 September 2019

 

 

 

 

 

 

Note

Unaudited

As at

30 September

2019

£'000

Unaudited

As at

30 September

2018

£'000

Audited

As at

31 March

2019

£'000

Assets

 

Non-current assets

 

Goodwill

5

10,328

10,328

10,328

Intangible assets

6

434

735

584

Property, plant and equipment

 

141

123

153

Right-of-use assets

 

660

-

-

Investments

7

102,021

77,827

87,659

Total non-current assets

 

113,584

89,013

98,724

Current assets

 

Trade and other receivables

 

707

578

782

Short-term liquidity investments

8

207

10,149

5,188

Cash and cash equivalents

8

17,979

28,900

25,210

Total current assets

 

18,893

39,627

31,180

Total assets

 

132,477

128,640

129,904

Current liabilities

 

Trade and other payables

9

(3,303)

(3,332)

(3,730)

Non-current liabilities

 

 

 

 

Lease liabilities

 

(656)

-

-

Deferred taxation

 

(81)

(136)

(109)

Total liabilities

 

(4,040)

(3,468)

(3,839)

Net assets

 

128,437

125,172

126,065

 

Equity

 

 

 

 

Issued share capital

 

3

3

3

Share premium

 

49,324

49,324

49,324

Other distributable reserve

 

70,000

70,000

70,000

Retained earnings

 

7,492

4,711

5,401

Share-based payments reserve

 

1,618

1,134

1,337

Total equity

 

128,437

125,172

126,065
           

 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

The condensed consolidated interim financial statements of Mercia Asset Management PLC were approved by the Board of Directors and authorised for issue on 2 December 2019. They were signed on its behalf by:

 

 

Dr Mark Payton                                              Martin Glanfield

Chief Executive Officer                                 Chief Financial Officer

Condensed consolidated cash flow statement

For the six months ended 30 September 2019

 

 

 

 

 

 

 

Note

Unaudited

Six months

ended

30 September

2019

£'000

Unaudited

Six months

ended

30 September

2018

£'000

Audited

Year

ended

31 March

2019

£'000

Cash flows from operating activities:

Operating profit

 

1,942

1,797

2,004

Adjustments to reconcile operating profit to net cash flows used in operating activities:

 

 

 

 

Depreciation of property, plant and equipment

 

36

42

84

Depreciation of right-of-use assets

 

77

-

-

Fair value movements in investments

 

(3,237)

(2,601)

(3,916)

Share-based payments charge/(credit)

 

281

(32)

171

Amortisation of intangible assets

 

150

150

301

Working capital adjustments:

Decrease in trade and other receivables

 

70

487

306

Decrease in trade and other payables

 

(440)

(4,428)

(4,030)

Net cash used in operating activities

 

(1,121)

(4,585)

(5,080)

 

Cash flows from direct investment activities:

Purchase of direct investments

 

(11,461)

(9,269)

(19,384)

Proceeds from the sale of direct investments

 

-

-

1,711

Investee company loan repayments

 

336

113

-

Net cash flows from direct investment activities

 

(11,125)

(9,156)

(17,673)

 

Cash flows from other investing activities:

Purchase of property, plant and equipment

 

(24)

(19)

(92)

Interest received

 

139

97

531

Decrease/(increase) in short-term liquidity investments

 

4,981

(149)

4,812

Net cash generated from/(used in) other investing activities

 

5,096

(71)

5,251

 

 

 

 

 

Net cash used in total investing activities

 

(6,029)

(9,227)

(12,422)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Redemption of subsidiary undertaking preference shares

 

-

(196)

(196)

Lease payments

 

(81)

-

-

Net cash used in financing activities

 

(81)

(196)

(196)

Net decrease in cash and cash equivalents

 

(7,231)

(14,008)

(17,698)

Cash and cash equivalents at the beginning of the period

 

25,210

42,908

42,908

Cash and cash equivalents at the end of the period

   8

17,979

28,900

25,210

 

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2019

 

 

 

 

 

Issued

share

capital

£'000

 

Share

premium

£'000

Other distributable

reserve

£'000

 

Retained earnings

£'000

Share-based payments reserve

  £'000

 

 

Total

£'000

As at 31 March 2018 (audited)

3

49,324

70,000

2,977

1,166

123,470

Profit and total comprehensive income for the period

 

-

 

-

 

-

 

1,930

 

-

 

1,930

Share-based payments credit

-

-

-

-

(32)

(32)

Redemption of subsidiary undertaking preference shares

 

-

 

-

 

-

 

(196)

 

-

 

(196)

As at 30 September 2018 (unaudited)

3

49,324

70,000

4,711

1,134

125,172

Profit and total comprehensive income for the period

 

-

 

-

 

-

 

690

 

-

 

690

Share-based payments charge

-

-

-

-

203

203

As at 31 March 2019 (audited)

3

49,324

70,000

5,401

1,337

126,065

Profit and total comprehensive income for the period

 

-

 

-

 

-

 

2,091

 

-

 

2,091

Share-based payments charge

-

-

-

-

281

281

As at 30 September 2019 (unaudited)

3

49,324

70,000

7,492

1,618

128,437

 

Notes to the interim financial statements  

For the six months ended 30 September 2019

 

1. Accounting policies

The principal accounting policies applied in the presentation of the condensed consolidated interim financial statements of Mercia Asset Management PLC ('the Group', 'Mercia' or 'the Company') are consistent with those followed in the preparation of the Group's Annual Report and consolidated financial statements for the year ended 31 March 2019. They have been consistently applied throughout the period ended 30 September 2019, except for those policies that relate to new standards and interpretations effective for the first time for accounting periods beginning on or after 1 January 2019, and which therefore apply to these condensed consolidated interim financial statements. Details of the new standards impacting the Group and which have given rise to changes in the Group's accounting policies, applied in the presentation of these condensed consolidated interim financial statements, are set out below.

 

General information

Mercia Asset Management PLC is a public limited company incorporated and domiciled in England, United Kingdom, and registered in England and Wales with registered number 09223445. Its Ordinary shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange. The registered office address is Mercia Asset Management PLC, Forward House, 17 High Street, Henley-in-Arden B95 5AA. Mercia Asset Management PLC's Ordinary shares were admitted to trading on AIM on 18 December 2014.

 

Basis of preparation

The financial information presented in these condensed consolidated interim financial statements constitute the condensed consolidated financial statements of Mercia Asset Management PLC and its subsidiaries for the six months ended 30 September 2019. These condensed consolidated interim financial statements should be read in conjunction with the Group's Annual Report and consolidated financial statements for the year ended 31 March 2019, which have been prepared in accordance with European Union ("EU") endorsed International Financial Reporting Standards ("IFRSs"), the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee ("IFRIC")) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS.

 

These condensed consolidated interim financial statements and the comparative financial information presented in these condensed consolidated interim financial statements for the period ended 30 September 2019 do not constitute full statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Group's Annual Report and consolidated financial statements for the year ended 31 March 2019 were approved by the Board on 5 July 2019 and have been delivered to the Registrar of Companies. The Group's independent auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

 

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 'Interim Financial Reporting', as adopted by the EU and the AIM Rules of the London Stock Exchange, on the going concern basis and in accordance with recognition and measurement principles of IFRSs as endorsed by the EU.

 

The financial information contained in these condensed consolidated interim financial statements, which were approved by the Board and authorised for issue on 2 December 2019, has been reviewed by the Group's independent auditor.

 

New standards and changes in accounting policies

IFRS 16, 'Leases' is effective for accounting periods beginning on or after 1 January 2019. The standard will be adopted in the Group's Annual Report and consolidated financial statements for the year ending 31 March 2020 and has been applied in the presentation of these condensed consolidated interim financial statements with effect from 1 April 2019. There are no other new standards that are not yet effective, that would be expected to have a material impact on the results of the Group.

 

IFRS 16, which replaces IAS 17 'Leases', introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets when such recognition exemptions are adopted. The impact of the adoption of IFRS 16 on the Group's consolidated financial statements is described below.

 

The Group has applied IFRS 16 using the cumulative catch-up approach which:

 

·      requires the Group to recognise the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings at the date of initial application; and

·      does not require restatement of comparatives, which continue to be presented under IAS 17 and IFRIC 4

Impact on the new definition of a lease

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or changed before 1 January 2019.

 

The change in definition of a lease mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. This is in contrast to the focus on 'risks and rewards' in IAS 17 and IFRIC 4.

 

The Group applies the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or changed on or after 1 January 2019. In preparation for the first-time application of IFRS 16, the Group has carried out an implementation project. The project has shown that the new definition in IFRS 16 will not significantly change the scope of contracts that meet the definition of a lease for the Group.

 

Impact on lessee accounting

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet.

 

Applying IFRS 16, for all leases (except as noted below), the Group:

 

a)    recognises right-of-use assets and lease liabilities in the condensed consolidated balance sheet, initially measured at the present value of the future lease payments, with the right-of-use assets adjusted by the amount of any prepaid or accrued lease payments in accordance with IFRS 16:C8(b)(ii);

b)   recognises depreciation of right-of-use assets and interest on lease liabilities in the condensed consolidated statement of comprehensive income;

c)    separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within financing activities) in the condensed consolidated cash flow statement.

Lease incentives (e.g. rent free periods) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease incentive, amortised as a reduction of rental expenses on a straight-line basis.

 

Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36.

 

For short-term leases (lease term of 12 months or less) and leases of low value assets (which includes portable electronic devices, small items of office furniture and fixed telephones), the Group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expense is presented within 'other administrative expenses' in profit or loss.

 

The Group has used the following practical expedients when applying the cumulative catch-up approach to leases previously classified as operating leases applying IAS 17:

 

·      The Group has applied a single discount rate to a portfolio of leases with reasonably similar characteristics.

·      The Group has adjusted the right-of-use assets at the date of initial application by the amount of provision for onerous leases recognised under IAS 37 in the condensed consolidated balance sheet immediately before the date of initial application as an alternative to performing an impairment review.

·      The Group has elected not to recognise right-of-use assets and lease liabilities to leases for which the lease term ends within 12 months of the date of initial application.

·      The Group has excluded initial direct costs from the measurement of the right-of-use assets at the date of initial application.

·      The Group has used hindsight when determining the lease term when the contract contains options to extend or terminate the lease.

 

Financial impact of initial application of IFRS 16 

The weighted average lessee's incremental borrowing rate applied to lease liabilities recognised in the condensed consolidated balance sheet on 1 April 2019 is 3.25%.

 

The following table shows the operating lease commitments disclosed applying IAS 17 at 31 March 2019, discounted using the borrowing rate at the date of initial application and the lease liabilities recognised in the condensed consolidated balance sheet at the date of initial application.

 

£'000

Operating lease commitments as at 31 March 2019

1,370

Short-term leases and leases of low value assets

(42)

Effect of discounting operating lease commitments as at 31 March 2019

(591)

Lease liabilities recognised at 1 April 2019

737

 

The Group has recognised £737,000 of right-of-use assets and £737,000 of lease liabilities upon transition to IFRS 16.

 

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In preparing these condensed consolidated interim financial statements, the significant judgements made by the Directors in applying the Group's accounting policies and the key sources of estimation uncertainty are the same as those applied to the consolidated financial statements for the year ended 31 March 2019. However, this should be considered in light of the new International Private Equity and Venture Capital Valuation Guidelines ("IPEVCVG") which are effective for accounting periods beginning after 1 January 2019 (published on 21 December 2018) and which the Group has adopted in these condensed consolidated interim financial statements.

 

Impact of new IPEVCV guidelines on the Group accounting policy

Investments are measured at fair value at each measurement date. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that a hypothetical transaction to sell an asset takes place in the principal market or, in its absence, the most advantageous market for the asset. For quoted investments, available market prices will be the exclusive basis for the measurement of fair value for identical instruments. For unquoted investments, the measurement of fair value requires the valuer to assume the underlying business or instrument is realised or sold at the measurement date, appropriately allocated to the various interests, regardless of whether the underlying business is prepared for sale or whether its shareholders intend to sell in the near future.

 

In estimating fair value for an investment, the valuer should apply a methodology that is appropriate in light of the nature, facts and circumstances of the investment in the context of the total investment portfolio and should use reasonable current market data and inputs, combined with reasonable market participant assumptions.

 

The price of recent investment can be used to estimate the enterprise value, before allocating to the various interests. The Group believes that this is still the most relevant technique to measure fair value for early-stage investments. However, it has also taken into consideration time elapsed, performance since and external market events to help inform its judgements.

 

0-6 months post last funding round

The Group will generally be content with the price of a recent investment for up to six months post the last funding round, subject to there being no material change to the investee company's prospects (which would include the prospects of drawing down the next tranche or raising the next round of funding).

 

7-18 months post last funding round

Beyond the six months point, the Group seeks assurance that the entity is progressing against the development milestones which were set out in the initial assessment. Failing to hit milestones will not necessarily impact the valuation - this may simply be an indicator that incremental value will take longer to deliver, but the performance against milestones is assessed as an indicator of a potential change in value. The Group will be extremely cautious about increasing the valuation of an early-stage entity unless based on a new market price or maintainable revenues and/or earnings.   

 

19+ months post last funding round

From this point onwards, the Group looks for additional support for the 'price of recent investment' by calibrating back to that using a discounted cash flow ("DCF") methodology. However, unless the entity has become established with maintainable revenues and/or earnings and can be valued on an earnings basis, given the inherent risk in early-stage investing and the lack or reliability of using estimates of such metrics yet to be delivered a number of years into the future, the Group is unlikely to increase the fair value even if a DCF calculation suggests a higher value. Nevertheless, the DCF calculation helps support the proposed fair value at the valuation point.

 

Principal risks and uncertainties

The risks and uncertainties that the Board considered to be key to achieving the Group's strategic objectives were detailed in the Annual Report and consolidated financial statements for the year ended 31 March 2019. A further assessment was made at the half year end and the principal risks identified were unchanged from those presented in the Annual Report.

 

Going concern

Based on the overall strength of the Group's balance sheet, including its liquidity position at the period end, together with its forecast future trading and investment activities, the Directors have a reasonable expectation that the Group has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors have adopted the going concern basis in preparing these condensed consolidated interim financial statements.

 

2. Segmental reporting

For the six months ended 30 September 2019, the Group's revenue and profit were derived from its principal activity within the United Kingdom.

 

IFRS 8 'Operating Segments' defines operating segments as those activities of an entity about which separate financial information is available and which are evaluated by the Chief Operating Decision maker to assess performance and determine the allocation of resources. The Chief Operating Decision Maker has been identified as the Board of Directors. The Directors are of the opinion that under IFRS 8 the Group has only one operating segment, being active specialist asset management, because the results of the Group are monitored on a Group-wide basis. The Board of Directors assesses the performance of the operating segment using financial information which is measured and presented in a consistent manner.

 

An analysis of the Group's revenue is as follows:

 

 

Unaudited

Six months

ended

30 September

2019

£'000

Unaudited

Six months

ended

30 September

2018

£'000

Audited

Year

ended

31 March

2019

£'000

Fund management fees

3,534

3,612

7,282

Initial management fees

797

527

1,134

Portfolio directors' fees

1,054

1,094

2,139

Other revenue

152

37

120

Total revenue

5,537

5,270

10,675

 

3. Fair value movements in investments

 

Unaudited

Six months

ended

30 September

2019

£'000

Unaudited

Six months

ended

30 September

2018

£'000

Audited

Year

ended

31 March

2019

£'000

Net fair value movements in investments

3,237

2,601

3,916

 

No other gains or losses have been recognised in respect of financial assets held at amortised cost. No gains or losses been recognised on financial liabilities held at amortised cost.

 

4. Earnings per share

Basic earnings per share is calculated by dividing the profit for the financial period by the weighted average number of Ordinary shares in issue during the period. Diluted earnings per share is calculated by dividing the profit for the financial period by the weighted average number of Ordinary shares outstanding and, when dilutive, adjusted for the effect of all potentially dilutive shares, including share options on an as-if-converted basis. The potentially dilutive shares are included in diluted earnings per share calculations on a weighted average basis for the period. The profit and weighted average number of shares used in the calculations are set out below.

 

 

 

Unaudited

Six months

ended

30 September

2019

Unaudited

Six months

ended

30 September

2018

Audited

Year

ended

31 March

2019

Profit for the financial period (£'000)

2,091

1,930

2,620

Weighted average number of Ordinary shares (basic) ('000)

303,310

303,310

303,310

Weighted average number of Ordinary shares (diluted) ('000)

303,628

303,333

305,018

Earnings per Ordinary share basic and diluted (pence)

0.69

0.64

0.86

 

The calculation of diluted earnings per share is based on the following data:

 

 

Unaudited

Six months ended

Unaudited

Six months ended

Audited

Year

Ended

 

30 September

30 September

31 March

 

2019

2018

2019

 

'000

'000

'000

Weighted average number of shares

 

 

 

Basic

303,310

303,310

303,310

Dilutive impact of share options

318

23

1,708

Diluted

303,628

303,333

305,018

 

The calculation of diluted earnings per share includes 5,335,555 (H1 2019: 3,685,555) share options that were antidilutive for the period because the exercise price together with the future IFRS 2 charge of the options is less than the average fair value of the Ordinary shares during the period.

5. Goodwill

 

£'000

As at 1 April 2018 (audited)

10,328

As at 30 September 2018 (unaudited)

10,328

As at 31 March 2019 (audited)

10,328

As at 30 September 2019 (unaudited)

10,328

 

Included in goodwill is £7,873,000 which arose on the acquisition of the entire issued share capital of Enterprise Ventures on 9 March 2016. This represents the difference between the fair value of consideration transferred and the fair value of assets acquired and liabilities assumed. The balance of £2,455,000 arose on the acquisition of Mercia Fund Management Limited in December 2014.

 

6. Intangible assets

Intangible assets represent contractual arrangements in respect of funds under management acquired through the acquisition of Enterprise Ventures, where it is probable that the future economic benefits that are attributable to the assets will flow to the Group and the fair value of the assets can be reliably measured.

 

£'000

Cost

 

As at 1 April 2018 (audited)

1,504

As at 30 September 2018 (unaudited)

1,504

As at 31 March 2019 (audited)

1,504

As at 30 September 2019 (unaudited)

1,504

Accumulated amortisation

 

As at 1 April 2018 (audited)

619

Charge for the period

150

As at 30 September 2018 (unaudited)

769

Charge for the period

151

As at 31 March 2019 (audited)

920

Charge for the period

150

As at 30 September 2019 (unaudited)

1,070

Net book value

 

As at 31 March 2018 (audited)

885

As at 30 September 2018 (unaudited)

735

As at 31 March 2019 (audited)

584

As at 30 September 2019 (unaudited)

434

 

7. Investments

The net change in the value of investments for the period is £14,362,000 (H1 2019: £11,757,000).

 

The Group's valuation policies are set out in detail in its consolidated financial statements for the year ended 31 March 2019. The table below sets out the movement in the balance sheet value of investments from the start to the end of the period, showing investments made, investee company loans repaid and the direct investment fair value movements.

 

£'000

As at 1 April 2018 (audited)

66,070

Investments made during the period

9,269

Investee company loan repayments

(113)

Unrealised gains on the revaluation of investments

3,189

Unrealised losses on the revaluation of investments

(588)

As at 30 September 2018 (unaudited)

77,827

Investments made during the period

10,115

Investee company loan repayments

(1,598)

Unrealised gains on the revaluation of investments

5,433

Unrealised losses on the revaluation of investments

(4,118)

As at 31 March 2019 (audited)

87,659

Investments made during the period

11,461

Investee company loan repayments

(336)

Unrealised gains on the revaluation of investments

4,758

Unrealised losses on the revaluation of investments

(1,521)

As at 30 September 2019 (unaudited)

102,021

 

8. Cash, cash equivalents and short-term liquidity investments

 

 

Unaudited

As at

30 September 2019

£'000

Unaudited

As at

30 September 2018

£'000

Audited

As at

31 March

 2019

£'000

Cash at bank and in hand

17,979

28,900

25,210

Total cash and cash equivalents

17,979

28,900

25,210

Total short-term liquidity investments

207

10,149

5,188

 

Cash at bank and in hand of £17,979,000 (H1 2019: £28,900,000) includes £437,000 (H1 2019: £768,000) of cash held on behalf of third-party EIS investors.

 

9. Trade and other payables

Trade and other payables includes the liability in respect of the £437,000 (H1 2019: £768,000) of cash held on behalf of third-party EIS investors.

 

10. Fair value measurements

The fair values of the Group's financial assets and financial liabilities are considered a reasonable approximation to the carrying values shown in the balance sheet. Subsequent to their initial recognition at fair value, measurement of movements in the fair values of financial instruments are grouped into Levels 1 to 3, based on the degree to which the fair value is observable. The fair value hierarchy used is outlined in more detail in note 2 of the Group's consolidated financial statements for the year ended 31 March 2019.

 

The following table gives information about how the fair values of these financial assets and financial liabilities are determined and presents the Group's assets that are measured at fair value as at 30 September 2019. The table in note 7 of these condensed consolidated interim financial statements sets out the movement in the balance sheet value of investments from the start to the end of the period.

 

 

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Assets:

 

 

 

 

Financial assets at fair value through profit or loss ("FVTPL")

 

890

 

-

 

101,131

 

102,021

As at 30 September 2019

890

-

101,131

102,021

 

The Directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in these condensed consolidated interim financial statements approximate to their fair values.

 

Financial instruments in Level 1

As at 30 September 2019, the Group had one (H1 2019: one) direct investment listed on AIM (Concepta PLC) and this has been classified as Level 1 and valued at its bid price as at 30 September 2019.

 

Financial instruments in Level 3

If one or more of the significant inputs required to fair value a financial instrument is not based on observable market data, the instrument is included in Level 3. Apart from the one investment classified as Level 1, all other investments held in the Group's direct investment portfolio have been classified as Level 3 in the fair value hierarchy and the individual valuations for each of the companies have been arrived at using appropriate valuation techniques.

 

A detailed explanation of the valuation techniques used for Level 3 financial instruments is given in note 2 of the Group's consolidated financial statements for the year ended 31 March 2019.

 

The table below summarises the fair value measurements.

 

 

 

 

Valuation technique

 

 

 

 

Level

 

Fair value

as at

30 September 2019

£'000

Listed investments    

1

 

890

Price of recent funding round

3

 

59,716

Cost

3

 

1,104

Enterprise value

3

 

33,673

Price of recent funding round or cost adjusted for impairment

3

 

6,638

 

 

 

102,021

 

The price of recent funding round or cost of investment provide observable inputs into the valuation of an individual investment. However, subsequent to the funding round or initial investment, the Directors are required to reassess the carrying value of investments at each period end, including an assessment of any impairment indicators, which result in unobservable inputs into the valuation methodology. Six direct investments are valued at an enterprise value, either based on a third-party valuation or given their stage of development and profitability.

 

11. Related party transactions

There has been no material change in the type of related party transactions described in the Group's consolidated financial statements for the year ended 31 March 2019.

 

Independent review report to Mercia Asset Management PLC

 

We have been engaged by Mercia Asset Management PLC to review the condensed consolidated set of financial statements in the half-yearly financial report for the six months ended 30 September 2019 which comprise the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of changes in equity and related notes 1 to 11. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of financial statements.

 

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules of the London Stock Exchange.

 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated set of financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the half-yearly financial report for the six months ended 30 September 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

 

 

Deloitte LLP

Statutory Auditor

Birmingham, United Kingdom

3 December 2019

Directors, secretary and advisers

 

 

Directors

 

Ian Roland Metcalfe

(Non-executive Chair)

Dr Mark Andrew Payton

(Chief Executive Officer)

Martin James Glanfield

(Chief Financial Officer)

Julian George Viggars

(Chief Investment Officer)

Raymond Kenneth Chamberlain

(Non-executive Director)

Dr Jonathan David Pell

(Non-executive Director)

Caroline Bayantai Plumb OBE   

(Non-executive Director)

 

Company secretary                                                                    Company registration number

Martin James Glanfield                                                              09223445

 

Company website                                                                        Solicitors

www.mercia.co.uk                                                                       Gowling WLG (UK) LLP

                                                                                                       4 More London Riverside

Registered office                                                                          London SE1 2AU

Forward House                                                           

17 High Street                                                                               Nominated adviser and joint broker

Henley-in-Arden                                                                           Canaccord Genuity Ltd

Warwickshire B95 5AA                                                                88 Wood Street

                                                                                                         London EC2V 7QR

Independent auditor                                                                 

Deloitte LLP                                                                                    Joint broker

Statutory Auditor                                                                         Nplus1 Singer Advisory LLP

Four Brindleyplace                                                                       1 Bartholomew Lane

Birmingham B1 2HZ                                                                      London EC2N 2AX

                                                                                                             

Principal bankers                                                                         Investor relations adviser

Barclays Bank PLC                                                                         Buchanan Communications Ltd

One Snowhill                                                                                 107 Cheapside

Snow Hill Queensway                                                                  London EC2C 6DN

Birmingham B4 6GN

                                                                                                          Company registrar

Lloyds Bank plc                                                                              SLC Registrars

125 Colmore Row                                                                         Elder House

Birmingham B3 3SD                                                                      St Georges Business Park

                                                                                                          207 Brooklands Road

                                                                                                          Weybridge

                                                                                                          Surrey

                                                                                                          KT13 0TS

                                                                                                             

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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