For immediate release

10 November 2016

 

Mercia Technologies PLC

 

Half Year Results

 

Scale and balanced investment portfolio brings revenue and net asset growth

 

Mercia Technologies PLC (AIM: MERC, "Mercia" or the "Group" or the "Company"), a national investment group focused on the creation, funding and scaling of innovative businesses with high growth potential from the UK regions, has published its half year results for the six months ended 30 September 2016. An electronic copy will also be available today on the Company's website at http://www.merciatech.co.uk/.

 

 

Group and portfolio developments 

·       Successful integration of Enterprise Ventures Group Limited ("EV") into the Group

·       £5.7million invested in nine portfolio companies of which three are new 'Emerging Stars', taking total invested since IPO to £30.0million

o  Two of three new Emerging Stars (Concepta plc and sureCore) originated from EV's managed funds, reflecting the benefit of enlarged pipeline of direct investment opportunities post EV acquisition

·       Third party funds: £8.6million raised and £11.5million invested into 58 companies in the period. Total managed funds of circa £228.0million at period end

·       Good progress across the portfolio. Notable highlights:

o  Portfolio company Concepta plc admitted to trading on AIM in July 2016

o  nDreams appointed by Google to make apps and experiences for Daydream, its virtual reality ("VR") mobile platform, together with the successful launch of nDreams' VR game, The Assembly

 

Financial highlights

·       Investment portfolio fair value up by £8.5million or 22% to £46.6million as a result of £5.7million of net new capital invested and £2.8million of net upward fair value movements

·       Net assets of £81.3million (2015: £80.2million)

·       Cash and short-term liquidity investments of £24.0million (2015: £48.5million)

·       Post-tax profit of £1.1million (2015: loss of £0.8million)

 

Post period end

·       Circa £1.7million invested post period end, including £1.0million into Oxford Genetics and £0.5million into nDreams

·       Oxford Genetics secured a £1.7million grant to fund further expansion

 

Mark Payton, Chief Executive of Mercia Technologies, said:

 

"The output from Mercia's strategy execution to date can be measured in three ways. Firstly, by the balanced and growing portfolio of direct investments, secondly by the significantly expanded pipeline of future potential direct investment prospects and finally, by the strengthened investment team. These tangible developments underpin the Group's objective of building a focused, sustainable and valuable investment business.

 

During the period, revenue in respect of trading activity grew to £2.9million compared with £0.7million in the same period last year. Mercia invested £5.7million net into three new and six existing direct investment portfolio companies (2015: £4.4million). At the period end the value of the Group's direct investment portfolio was £46.6million (2015: £29.2million), an increase of £37.6million since the Group's IPO in December 2014. Overall, Mercia reported a post-tax profit of £1.1million (2015: £0.8million loss).

 

In addition, the Group invested £11.5million into 58 companies through its managed funds (this includes transactions completed by Enterprise Ventures' managed funds), adding to the growing pipeline of future direct investment prospects. Complementing the existing managed funds, £8.6million was raised in new EIS/SEIS funds to support early stage deal flow.

 

At Mercia's debut on AIM in December 2014, the Board stated that it was raising sufficient funds to build out the business over a two to three year period, with use of funds split 70% to invest into new and existing direct investments and the remaining 30% for regional expansion, selective acquisitions and to fund the Group's operating activities. I am pleased to report good progress on all of these elements with these results, as our focused activities begin to bear fruit. Thus far, over £30.0million of the IPO proceeds have been invested to strengthen our direct investment portfolio and this is in line with what was set out in the Group's Admission Document."

 

Enquiries:

 

Mercia Technologies PLC (www.merciatech.co.uk)	+44 (0) 330 223 1430
Dr Mark Payton, Chief Executive Martin Glanfield, Chief Financial Officer Matthew Mead, Chief Investment Officer
Cenkos Securities	+44 (0) 20 7397 8900
Ivonne Cantu/Mark Connelly (NOMAD)
Buchanan	+44 (0)20 7466 5000
Sophie McNulty, Victoria Hayns, Stephanie Watson

 

Note to editors

Mercia is a national investment company focused on the creation, funding and scaling of innovative businesses with high growth potential from the UK regions. Mercia benefits from 18 university partnerships and six offices across the Midlands, the North of England and Scotland providing it with access to high quality, regional deal flow. Mercia Technologies PLC is quoted on AIM with the epic "MERC".

 

Mercia's 'Complete Capital Solution' investment model initially nurtures businesses via its third party funds (expanded to circa £228.0million following its acquisition of Enterprise Ventures Group Limited) and then over time Mercia can provide further funding to its 'Emerging Stars' by deploying direct investment follow-on capital from its own balance sheet.

 

In a recent report (Source: Beauhurst, The Deal, 2015/16), Mercia was found to be the fifth most active investor in the UK and the fourth most active in technology. Since its IPO in December 2014, the Company has invested over £30.0million directly across its portfolio of Emerging Stars.

 

 

Overview

 

The six month period to 30 September 2016 has seen Mercia continue on its rapid growth path since its debut on AIM in December 2014. During the 23 months since IPO:

 

·      The fair value of the Group's direct investment portfolio has grown fivefold, from £9.0million to £46.6million as a result of £30.0million of net new capital invested and £7.6million of net upward fair value movements;

·      The portfolio of direct investments has more than doubled, from 11 to 26;

·      Managed funds have grown from circa £22.0million to circa £228.0million;

·      The pipeline of new potential direct investments (via the total managed funds) has grown from circa 35 companies to circa 150;

·      Office locations which provide access to, and management of, early-stage deal flow have grown from one to six; and

·      University partnerships have grown from nine to 18.

 

Mercia's objective of creating a stable, sustainable and scalable infrastructure has been successfully met in this initial phase of the Group's development. In parallel the Directors are focused on building value from the direct investment portfolio to realise shareholder returns over the medium term. The progression of two of Mercia's direct investments onto AIM to date (Concepta plc in July 2016 and Abzena plc in July 2014) is a good illustration of this strategy in action.

 

The direct investment portfolio has grown significantly over this 23 month period (since Mercia's AIM debut) with investee company combined turnover having risen to circa £30.0million (from circa £15.0million) and employee numbers within the portfolio companies having doubled from circa 300 to over 600. In addition, a number of the portfolio companies have entered into relationships with strong industry-relevant corporates to accelerate their development and path to commercialisation. The progress of the Digital & Digital Entertainment portfolio as outlined in an RNS Reach update in October 2016, is of particular note.

 

With approximately £228.0million of third party managed funds, Mercia is now in the strong position of having created a significant pipeline of potential future direct investments, as well as securing a growing fee contribution to cover the majority of its operating costs. This blend of capital ensures that the majority of the funds raised at IPO continue to be used for direct investment purposes.

 

Financial performance was on track for the six month period, with the Group reporting revenues of £2.9million (2015: £0.7million), generated from its fund management and direct investing activities. Valued in accordance with International Private Equity and Venture Capital Valuation Guidelines, the direct investment portfolio increased 22% in value to £46.6million, which included new direct investments totaling £5.7million and net unrealised fair value gains of £2.8million.

 

The Board is already seeing the early metrics of delivery against the Group's strategy. There has been a material uplift in the holding value of nDreams. The recent admission to AIM of Concepta plc has thus far been a success, as demonstrated by strong subsequent share price gains, resulting in a material uplift in the carrying value of Mercia's stake. We have however decided to adjust downwards the value of our stake in Science Warehouse from £12.6million to £9.9million, largely to reflect the current valuation multiples of peer group companies.

 

The Mercia Model

 

Mercia's vision is to be a leading national organisation in the creation, funding and scaling of innovative businesses with high growth potential.

 

To achieve this, Mercia is:

·      focusing on technology rich sectors with high growth potential in which the Group has developed significant expertise, namely Software & the Internet, Digital & Digital Entertainment, Electronics, Materials & Manufacturing/Engineering and Life Sciences & Biosciences;

·      building a team of Investment Directors with significant industry and investment experience. With 60 employees, 25 of whom are threshold competent investment executives, Mercia benefits from a blended team of industry veterans, successful entrepreneurs and venture capitalists, providing the necessary insight to scale and exit investments across its selected sectors;

·      seeking strategic syndication into the direct investments in which material equity positions have been established, thus achieving progressive valuations while retaining meaningful upside until an appropriate exit path is chosen;

·      expanding the size of its managed funds and therefore building a sustainable pipeline of future Emerging Stars, whilst also generating fee income to offset the majority of the Group's operating costs;

·      continually assessing its operating environment to evaluate acquisition opportunities of complementary businesses or investment assets;

·      maximising its relationships with universities, accelerators, incubators, other deal flow sources and in-house business creation experience to match known market opportunities; and

·      operating in the capital-underserved regions of the Midlands, the North of England and Scotland where having a local presence provides a material advantage as well as the relevant, on the ground knowledge to identify and support some of the most exciting and innovative technology businesses.

 

Third Party Funds

 

Mercia is differentiated from its comparators by having circa £228.0million of third party funds managed by its wholly owned subsidiaries. In addition to Mercia's existing fund mandates, the Group is currently seeking new mandates for key public-sector supported regional funds. Fundraising for its SEIS/EIS funds also continued during the period with the majority of the £8.6million raised to be invested in this tax year, compared with circa £5.0million in the previous year.

 

Outlook

 

We are acutely aware of the current macroeconomic climate both nationally (following the EU referendum) and globally (following the US election). In these challenging conditions, corporates continue to turn to technology to achieve scale, cost efficiencies and productivity gains. This trend should support the ongoing development of the companies within Mercia's portfolio, focused as it is on technology rich sectors.

 

The Board believes that Mercia's hybrid investment model, with managed fund income covering a significant proportion of its operating costs, coupled with a growing balanced portfolio of direct investments, puts Mercia in a strong position to push ahead in those sectors in which it has specialist insight, to generate attractive returns for both shareholders and managed fund investors over time.   

 

During the coming months, the Group will seek syndicated investment rounds for some of its direct investments as a natural progression of its funding strategy, whilst focusing on the medium to long-term goal of realising profitable exits from its investments. 

 

 

Dr Mark Payton

Chief Executive Officer

 

 

Portfolio Review

 

The Group has been very active during the six months to 30 September 2016, making direct investments in nine companies, with the portfolio expanding from 22 direct holdings as at 31 March 2016 to 26 as at 30 September 2016. The Group will continue to add to the direct investment portfolio during the next six months and has already invested over £1.7million in four existing Emerging Stars since the period end.

 

The direct investments were held at a combined value of £46.6million as at 30 September 2016, which is up by 22% from £38.1million as at 31 March 2016. This movement in value is driven by £5.7million of new capital invested and £2.8million of net upward fair value movements.

 

14 of the top 18 direct investments are discussed in more detail below and account for £39.8million (85.4%) of the carrying value of the entire direct investment portfolio. 

 

During the period under review £0.8million (14.0%) has been invested in the Software & the Internet sector, £0.8million (14.0%) in Digital & Digital Entertainment, £2.1million (36.9%) in Electronics, Materials & Manufacturing/Engineering and £2.0million (35.1%) in Life Sciences & Biosciences. The continual balancing of the direct investment portfolio (by value and number) ensures that no single company or sector dominates the portfolio and therefore the risks attached to any one sector or company are mitigated.

 

We have seen a large number of our assets across each of the target sectors making excellent progress in the six months since 31 March 2016, resulting in an overall aggregate fair value gain of £2.8million, comprising £6.0million of fair value uplifts and £3.2million of downward adjustments. Concepta Diagnostics was admitted to AIM as Concepta plc through a reverse into an AIM shell and the share price has since performed strongly, leading to a fair value gain of £2.5million in the period. We have also recognised a fair value gain of £3.0million in nDreams, reflecting the progress the business has made in the exciting but still emerging virtual reality ("VR") games and experiences market. The fair value uplift is supported by an independent valuation appraisal.

 

In addition to Concepta a number of Mercia's other healthcare companies are performing well, including Oxford Genetics and Medherant, as detailed further below. We have also recognised a £0.5million fair value gain in The Native Antigen Company which has successfully doubled revenue in its most recent year of trading and moved into profitability. At the period end a fair value impairment of £2.7million has been made against the equity carrying value of Science Warehouse. This is largely as a result of a recent review of current peer group comparable companies and reflects Mercia's principle of carrying assets at this stage of maturity against benchmarked valuation multiples. Although at a slower rate than in 2015/16, Science Warehouse has continued to grow its revenues in the last six months and is making good headway with its plans to broaden its product set and customer base internationally.

 

We are pleased with the overall progress and balance across the portfolio in all of our sectors and we are already seeing the benefits of the enlarged and fully integrated investment team, following the acquisition of Enterprise Ventures Group Limited ("EV") in March this year. Our unique blend of experienced entrepreneurs who have deep insight into their chosen technology sector, in combination with investment professionals holding broad venture capital skills, has created a strong investment team to build and manage the direct investment portfolio and to create the pipeline of future Emerging Stars.

 

Software & the Internet

The Gartner Worldwide IT Spending Forecast (a leading indicator of technology trends across the hardware, software, IT services and telecom markets) provides a sense of scale to this sector, estimating that worldwide IT spend is forecast to total $3.5trillion in 2016. The software market alone is huge, estimated by Reuters to be around £660.0billion. Mercia focuses principally on application software and security solutions, targeting businesses with fast growing, scalable revenues.

 

During the six months ended 30 September 2016 key portfolio developments in this sector included:

 

Science Warehouse

Science Warehouse joined the portfolio in December 2014 and was originally a spinout from the University of Leeds. As at 30 September 2016 Mercia held a 62.6% interest. In accordance with Mercia's valuation policy, the Group has revalued its holding in Science Warehouse to £9.9million (2015: £12.6million) as a result of a review of current peer group comparable company valuation multiples and an increasingly competitive marketplace. No new investment was made during the period.

 

Founded in 2000, Science Warehouse delivers a cloud-based procurement, catalogue and spend analysis platform with a highly intuitive user interface, ensuring customers have control of the purchasing cycle from requisition to payment, helping deliver cost savings and manage spend. Its core vertical markets are in further education and health services.

 

Science Warehouse continues to grow, with further revenue gains in the first half of the current financial year as well as having extended its offering in its spend management platform through adding product capability in the areas of supplier information management, spend management analytics and improved search. In particular, the company has experienced encouraging results in Australia where it recently opened a sales office. Sales wins include the University of Queensland and the Federation University. Following the earlier appointment of a new CEO, the business has further strengthened its management team through the recent appointment of a new chairman. This enhanced team has made an encouraging start, including launching new product extensions and implementing improvements in its technology platform to meet the increasingly sophisticated needs of its customer base to drive growth.

 

Allinea

Allinea joined the portfolio in December 2014. The business was originally a spinout from the University of Warwick and Mercia was a founding investor, initially through its managed funds in 2010. As at 30 September 2016 the Group held a 16.6% interest at a fair value of £1.9million (2015: £0.9million) based upon the latest trading results. No new investment was made during the period.

 

Allinea is a profitable, cash generative business. It provides a leading global solution in the optimisation and debugging software tools industry, for the development and use of high performance computing applications. Customers include Oakridge National Laboratories, French Nuclear Authority, Scandia National Laboratories, University of Tokyo and The Met Office.

 

Revenue, profits and cash balances have continued to increase as Allinea progresses very well. The company has enhanced its product set with a major release during the half year. Particularly pleasing have been the first sales to Japan, demonstrating that Allinea is now a truly global software company winning sales in the US, Europe and the Far East.

 

Intelligent Positioning

Intelligent Positioning joined the portfolio in November 2015. As at 30 September 2016 Mercia held a 21.5% interest at a fair value of £1.8million (2015: £nil). £0.8million was invested during the period and the investment is held at cost.

 

Intelligent Positioning is a developer of real-time search intelligence and Search Engine Optimisation ("SEO") analytics solutions for businesses. The company helps businesses to optimise their web presence through detailed and actionable reports on search ranking performance against key competitors. It works with agencies and leading brands to help them enhance their online presence. Customers include L'Oreal, Financial Times, Invesco and Legal & General.

 

The company is seeing strong revenue growth and continues to make its transition from a services to a software as a service ("SaaS") product business with 70% of its revenues now being from Saas product sales. The team has recently opened a new sales office in New York and has started to make inroads into the much larger US market.

 

Digital & Digital Entertainment

The video games sector is the largest in the entertainment sector, worth £92.0billion in 2015 and estimated to rise to £118.0billion by 2019, according to figures published by Newzoo. The market has seen consistent annual growth rates of around 6% which demonstrates the value creation opportunities that exist in this space. The UK is recognised globally as a centre of excellence in game development, publishing and creativity and we continue to see a strong flow of opportunities.

 

During the six months ended 30 September 2016 key portfolio developments in this sector included:

 

nDreams

nDreams joined the portfolio in December 2014. As at 30 September 2016 Mercia held a 40% interest at a fair value of £6.7million (2015: £1.9million) plus a £1.0million convertible loan held at cost, resulting in an overall holding value of £7.7million. There has been no new investment during the period but Mercia has recognised a fair value uplift of £3.0million and is now holding the asset at an enterprise value of £18.0million. This valuation is supported by a recent independent appraisal.

 

nDreams was founded in 2006 by Patrick O'Luanaigh, the creative director of Tomb Raider, as a game and experiences developer. Created initially to provide content for Sony PlayStation Home virtual world (a virtual 3D social gaming platform for the PlayStation 3), with direction and support from Mercia it later leveraged this expertise to become one of the first organisations to move into software development purely for VR.

 

In the last six months the management team has made excellent progress building out a portfolio of games and experiences for both high end and mobile VR, including the successful launch of The Assembly in July 2016 which made it to number one in the Oculus VR charts and has now been launched on the new Sony Playstation VR headset. Meanwhile, development continues on many fronts including for the new Google VR platform, Daydream. One of nDreams' titles will be a major part of the launch of this key new platform later this calendar year.

 

VirtTrade

As at 30 September 2016 Mercia held a 28.4% interest at a fair value of £2.8million (2015: £2.5million). £0.3million was invested during the period. The Group's equity investment is held at the price of the last investment round and the recent £0.3million convertible loan is held at cost.

 

VirtTrade has developed a unique engine that takes the principle of a traditional printed trading card collection and turns it into an interactive digital trading experience. This results in the players being able to trade one digital card for many globally in an open market. Unlike traditional trading cards, the VirtTrade platform can take live data feeds from the player, the brand or IP owner and the outside world. This enriches the trading experience as well as providing some exciting and novel opportunities. Monetisation comes from a mix of paid for and free collectable cards.

 

In the period VirtTrade has continued to build on its global relationship with Panini, which has recently released the 2017 version of its digital collectible app, NFL GRIDIRON, making it to number one in the US sports IOS charts just two weeks after release. Panini is providing heavyweight marketing support for the title through the months to Christmas. The updated and improved NBA Dunk app will also be released before Christmas plus one other new title which will be announced in the near future.

 

Edge Case Games

Edge Case Games joined the portfolio in July 2015. As at 30 September 2016 Mercia held a 21.2% interest at a fair value of £2.3million (2015: £1.1million). £0.5million was invested during the period. The investment is held at the price of the last funding round.

 

Edge Case Games was established in June 2014 as a new business under Mercia's guidance using seed and early stage finance through its third party funds and is a free to play, games-as-a-service business. The business, which is led by industry veterans James Brooksby and Chris Mehers, operates in the large and growing multiplayer online sub-sector of the gaming market.

 

In the last six months the management team has made very good progress. The team successfully took 'Fractured Space', the company's space PC game, out of Steam's 'Early Access' and into a full launch in September 2016. Early download and sales data have been strong with average revenue per paying customer as high as $20, and the company achieved more than 150,000 unique installations of the innovative game during the first week following the launch as a free to play title. So far the game has generated over $1.0million in revenue and now has over 75,000 monthly active players. The company is re-evaluating its strategic options for the Chinese mobile games market, having experienced challenges in its collaboration with Seasun Games. In the short term the management team is focused on maximising the potential of Fractured Space.

 

Electronics, Materials & Engineering/Manufacturing

According to the Government's Advanced Manufacturing Catapult website, manufacturing in the UK contributes 11% of UK Gross Value Added and remains a vital sector for the economy, employing over 2.6million people. Over recent years there has been a resurgence in advanced manufacturing in the UK and this is evidenced by the many examples of innovation in the areas of material and hardware technology throughout the UK regions where Mercia is active.

 

During the six months ended 30 September 2016 key portfolio developments in this sector included:

 

Smart Antenna Technologies

Smart Antenna Technologies, a spinout from the University of Birmingham, joined the portfolio in December 2014. As at 30 September 2016 Mercia held a 29.5% interest at a fair value of £1.8milion (2015: £0.6million). No new investment was made during the period and the investment is held at the price of the last funding round.

 

The company, which is based in Birmingham, is developing multi-function antenna solutions for mobile phones, tablets, laptops and smart TVs and its highly scalable technology has the potential to lower costs, reduce size, increase frequency range and offer much needed performance gains over existing designs and technologies.

 

In the last six months the management team has continued to engage with leading global manufacturers of portable devices and it is expected that the results of these discussions will be reported within the next 12 months.

 

Impression Technologies

Impression Technologies joined the portfolio in July 2015. As at 30 September 2016 the Group held an 18.4% interest at a fair value of £1.5million (2015: £0.8million). No new investment was made during the period and the investment is held at cost.

 

Impression Technologies, which is based in Coventry, is involved in the forming of complex, high strength, lightweight, ductile components used in the automotive, rail and aerospace industries. The company's patented heat treatment, forming and in die quenching ("HFQ^®") technology was developed by Impression Technologies and Imperial College, building on founding research at the University of Birmingham. The result is complex but lightweight aluminum components which do not compromise the strength or metallurgical properties of the material.

 

In the period a new CEO, Jonathan Watkins, has joined the business to drive its commercial progress with leading automotive brands and suppliers, such as Aston Martin, which has included HFQ^® parts in its recently launched DB11 model. The business has begun production at its new pilot pressing facility and has also begun to explore new overseas market opportunities.

 

Warwick Audio Technologies

Warwick Audio Technologies joined the portfolio in December 2014 and was originally a spinout from the University of Warwick. As at 30 September 2016 the Group held a 73.6% interest at a fair value of £2.4million (2015: £0.6million). £1.0milion was invested during the period and the investment is held at the price of the most recent investment round.

 

Warwick Audio Technologies, which is based in the Midlands, has developed and patented a new style of electrostatic speaker. This speaker is extremely lightweight, thin and flexible and produces very high quality audio, easily exceeding the standard set for Hi-Res Audio by the Japanese Audio Society. The novel manufacturing process pioneered with this design enables these speakers to be produced reliably at scale to a very high standard, with consistent performance. This makes them potentially one of the most cost-effective Hi-Res Audio transducers on the market.

 

In the last six months the company has worked on delivering its product to the headphone market, initially focusing on the audiophile segment with a wired at-home product. Over the next 12 months it will turn its focus to the wireless closed back premium portable segment, where the company believes that major opportunities lie in creating a premium product for the iPhone 7 and other portable players. In the long term, the company will look to expand into other markets where the characteristics of its technology deliver benefits, in particular the automotive market. Post period end the company has announced the appointment of former BOSE VP, Gary Waters, to the board as a non-executive director.

 

sureCore

sureCore joined the portfolio in June 2016 and was sourced from the recently acquired EV portfolio. As at 30 September 2016 Mercia held a 13.3% interest at a fair value of £0.8million (2015: £nil). The investment is held at cost.  

 

The company, which is based in Sheffield, is led by a team of industry experts with combined experience in the industry of nearly 100 years. The company develops and licenses low power and low operating voltage embedded memory IP designs for the semiconductor industry. sureCore is successfully exploiting growing market demand for more memory and lower power consumption in leading edge devices, such as those serving the networking space as well as the Internet of Things and wearable and consumer/handheld products.

 

In the last six months the management team has built a significant pipeline of potential customers, which are at various stages of evaluating the technology offering. Furthermore, the company has received verbal confirmation from a large Japanese customer of its preference to license the technology for its next product development which will start in Q4 2016. The company has also been awarded two significant grants for the development of next generation memory technology. 

 

Life Sciences & Biosciences

The Life Sciences & Biosciences sector is of particular interest to Mercia as almost two-thirds of employment within this sector is found outside of London, instead residing within the UK regions. Mercia seeks investments into capital efficient businesses within this sector and excludes the more capital intensive therapeutics businesses that often have lengthy and more challenging regulatory pathways. The focus within this sector includes sub-sectors with the opportunity to move quickly into revenue such as digital healthcare, medtech services, synthetic biology and diagnostics businesses. According to UK government figures (www.lifesciences.ukti.gov.uk/trade-campaigns/in-vitro-diagnostics/), the global medical technology market is expected to reach $455.0billion by 2018, with in vitro diagnostics, for example, anticipated to be the largest segment ($58.8billion in 2018). In vitro diagnostics inform healthcare decision making; 70% of clinical decisions in the NHS alone are based on laboratory tests or near patient tests (point of care). UK capability is strong with some 220 companies spanning 'innovative platform providers', 'products & kits' and 'supply chain technologies'. A strong R&D base and a lead in genomics sequencing, synthetic biology and digital health are providing access to cutting edge technologies here within the UK.

 

During the six months ended 30 September 2016 key portfolio developments in this sector included:

 

Concepta plc

Concepta is a new direct investment and joined the portfolio in May 2016 as the first direct investment made from the EV portfolio. As at 30 September 2016 Mercia held an 18.3% interest at a fair value of £3.9million (2015: £nil). £1.4million was invested during the period and the fair value gain of £2.5million is based on Concepta's closing share price as at 30 September 2016, which has performed well since its admission to AIM.

 

The company, which is based in York, is developing a portfolio of women's health diagnostic products which monitor pregnancy, fertility and menopause. This is initially targeted at the Chinese market but will have the potential for future rollout to the rest of the world. The choice of China as the initial market reflects the core management strength and knowledge of the Chinese consumer diagnostic market and a clear market need as the gold-standard western-developed devices are not currently available.

 

The last six months have been extremely busy following the company's successful admission to AIM, which took place in July 2016, raising £3.5million. The management team is currently focused on the siting of a new manufacturing plant in Yorkshire and the launch of the MyLotus product in China later this year and subsequent to CE marking, targeting its launch in the UK and Europe in 2017.

 

Oxford Genetics

Oxford Genetics joined the portfolio in December 2015. As at 30 September 2016 Mercia held a 34.7% interest at a fair value of £1.2million (2015: £nil). No new investment was made in the period and the investment is held at cost.

Oxford Genetics, a leader in synthetic biology, is a specialised contract research organisation offering services to support the discovery, development and production of biologics, gene and cell therapies. The company has expertise in designing DNA, optimising expression of proteins, cell line development and improving viral gene delivery systems.

 
In the last six months the business has moved to new purpose built 6,000 sq ft facilities, achieved ISO quality status, expanded its commercialisation and management teams and is now providing a number of pharmaceutical clients with its services. Over the next 12 months the company aims to license its technologies in the rapidly expanding markets of cell and gene therapy. Post period end a further £1.0million has been invested and a grant of £1.7million has been awarded, both combining to continue to fuel the growth of this innovative business.

 

The Native Antigen Company

The Native Antigen Company joined the portfolio in December 2014 and was originally a spinout from the University of Birmingham. As at 30 September 2016 the Group held a 30.6% interest at a fair value of £1.1million (2015: £0.3million). No new investment was made in the period.

 

The business was established in 2010 and specialises in the research, development and scale-up manufacturing of highly pure viral and bacterial native antigens. It trades with over 50 organisations worldwide with exports accounting for 90% of its sales, much of which is annual repeat business.

 

Revenues continue to grow and this year revenue has doubled, taking the business into profitability and cash generation. The next step for the business is to further develop its growth opportunities and explore related applications of its technology, with a strong focus on the infectious disease sector. In accordance with Mercia's valuation policy and given the strong and profitable trading position of the business, the Group has moved to valuing its holding on a trading multiple basis, whereas previously the asset was valued on the basis of the price of the last investment round. This results in a fair value uplift of £0.5million.

 

Medherant

Medherant, originally a University of Warwick spinout, is the most recent addition to the direct investment portfolio, joining in September 2016. As at 30 September 2016 the Group held an 11.7% interest at a fair value of £0.7million (2015: £nil) and the investment is held at cost.

 

The company, which is based in the Midlands, is an IP-rich business focused on developing its transdermal drug delivery patch, known as the TEPI Patch^®, for the widely used pain management drugs Ibuprofen and methyl salicylate. The patch, which incorporates novel adhesive technology licensed from Bostik, will also provide wider drug delivery opportunities across a number of therapeutics areas. As a result of the patch's ease of manufacture, efficient delivery and reduced use of material, the technology also has the potential to remove huge cost burdens from healthcare systems.  

 

The company has just received scientific advice from the Medicines and Healthcare products Regulatory Agency in relation to its first product, for which a programme of pre-clinical studies is underway, and plans are being finalised to enter into clinical studies in 2017. Medherant has a pipeline of four other products from which it will select one or two for full pre-clinical development. The management team is also in discussion with numerous pharmaceutical companies regarding potential licensing of the products in its pipeline and is negotiating with some that would like to investigate the potential of TEPI Patch^® to deliver their drug of interest.

 

Remaining direct investment holdings

As at 30 September 2016, the Group's remaining 12 direct shareholdings collectively accounted for £6.9million in value or 14.8% of the total direct investment portfolio.

 

We are pleased with the progress of the portfolio as a whole over the last six months and have a number of assets where we expect strong revenue growth during the next six month period. We will continue to selectively add new Emerging Stars and build a balanced portfolio of exciting businesses.

 

 

Matt Mead

Chief Investment Officer

 

 

Financial Review

 

Mercia has made further positive financial progress in the period under review. The financial results for the six months ended 30 September 2016 are notable for both the increased scale in the Group's revenues and operating activities, following Mercia's acquisition of EV in March 2016, and the fact that Mercia has now invested £30.0million of its 2014 IPO proceeds into its growing portfolio of direct investments, which totalled 26 (2015: 19) at the period end.

 

During the six months ended 30 September 2016 the Group invested £5.7million net (2015: £4.4million) in six existing and three new direct investments (2015: seven and four respectively). Since the period end the Group has invested a further £1.7million (2015: £4.2million) in four (2015: six) existing Emerging Stars.

 

As at 30 September 2016 the fair value of the Group's direct investment portfolio was £46.6million (2015: £29.2million). Net fair value gains during the period totalled £2.8million (2015: £0.2million). Net assets at the period end were £81.3million (2015: £80.2million), including cash and short-term deposits totalling £24.0million (2015: £48.5million).

 

The net fair value gains referred to above contributed favourably to a consolidated total comprehensive profit for the period of £1.1million (2015: £0.8million loss).

 

The net fair value gain is a positive indication of value creation momentum within the direct investment portfolio, notwithstanding the relatively short time in which the Group's net IPO proceeds are being invested.

 

Acquisition of Enterprise Ventures Group Limited

On 9 March 2016 Mercia Technologies acquired EV's entire issued share capital for up to £11.0million and an amount equal to EV's net cash at completion which was £2.0million. The initial consideration was £9.0million, comprising £8.3million satisfied in cash on completion and £0.7million satisfied by the issue of 1,645,711 initial consideration shares priced at 42.0 pence (being the average of the daily closing mid-market price for an Ordinary share of Mercia for the five trading days immediately preceding completion).

 

Deferred consideration of up to £2.0million will also be payable, contingent upon EV raising at least £80.0million of net new third party funds during the two year period post completion, to be satisfied by the issue of additional Mercia Ordinary shares.

 

During the six month period under review EV contributed £2.1million (2015: nil) to total Group revenues of £2.9million (2015: £0.7million). EV has been integrated into the Group and the combined investment and back office teams are working well together.

 

Summarised consolidated statement of comprehensive income

 

	Six months ended 30 September 2016 £'000	Six months ended 30 September 2015 £'000	Year ended 31 March 2016 £'000
Revenue	2,887	654	1,755
Cost of sales	(49)	(35)	(79)
Fair value movements in investments	2,807	244	896
Administrative expenses	(4,292)	(1,698)	(4,011)
Share-based payments charge	(166)	(99)	(230)
Amortisation of intangible assets	(150)	-	(17)
Exceptional items	-	-	(372)
Finance income	97	186	361
Profit/(loss) and total comprehensive income/(loss) for the financial period	1,134	(748)	(1,697)
Basic and diluted earnings/(loss) per Ordinary share (pence)	0.53	(0.35)	(0.80)

 

 

Revenue and cost of sales

Total revenues of £2,887,000 (2015: £654,000) comprise fund management fees, initial management fees from new investments, investment director monitoring fees and sundry business services income. Cost of sales represents third party fees incurred for administering the funds under management by Mercia Fund Management Limited ("MFM").

 

Fair value movements in investments

	Six months ended 30 September 2016 £'000	Six months ended 30 September 2015 £'000	Year ended 31 March 2016 £'000
Investment movements excluding cash invested:
Unrealised gains on the revaluation of investments	6,052	794	1,582
Unrealised losses on the revaluation of investments	(3,245)	(550)	(686)
Net fair value gain	2,807	244	896

 

For the six months ended 30 September 2016, unrealised fair value gains arose in five (2015: four) out of the Group's 26 (2015: 19) direct investments. The largest fair value gain was nDreams Limited, which accounted for £2,962,000 of the total. There were five (2015: two) fair value impairments, the largest being £2,737,000 for Science Warehouse Limited.

 

Share-based payments charge

The £166,000 (2015: £99,000) non-cash charge arises from the issue of share options to 15 members of staff from the date of the IPO to 31 March 2016 and 40 more during the period to 30 September 2016, the majority of those new option awards being to EV's staff.

 

Amortisation of intangible assets

The amortisation charge of £150,000 (2015: £nil) represents amortisation of the acquired intangible assets of EV for the six month period under review.

 

Other administrative expenses

Total administrative expenses of £4,292,000 (2015: £1,698,000) consisted predominantly of staff related costs. Total headcount is growing in line with the Group's stated objectives at the time of the IPO.

 

Finance income

Finance income of £97,000 (2015: £186,000) was predominantly interest receivable earned on the Group's cash and short-term liquidity investments. The reduction from 2015 is attributable to the amount of cash now invested in the direct investment portfolio.

 

Balance sheet and cash flows

Net assets at the period end of £81,341,000 (2015: £80,190,000) were predominantly made up of the Group's direct investment portfolio, together with cash and short-term liquidity investments. The Group has 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 £38,143,000 (2015: £24,617,000) to £46,616,000 (2015: £29,223,000). The table below lists the Group's investments by value as at 30 September 2016, including a breakdown of the cash invested during the period, the fair value movements at the period end and the equity percentage of each company owned.