Frontier Ip Regulatory News (FIPP)

The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310 ("MAR"). With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

27 October 2022

Frontier IP Group Plc

("Frontier IP" or the "Group")

Final results for the year ended 30 June 2022

Financial highlights

· Net assets per share as at 30 June 2022 increased 27% to 88.5p (30 June 2021: 69.8p)

· Basic earnings per share increased 6% to 18.60p (2021: 17.47p)

· Part-disposal of holding in Exscientia generated cash of £6,525,000 in the period under review (2021: nil) realising a profit of £2,867,000 (2021: nil).

· Total revenue and other operating income increased by 11% to £14,104,000 (2021: £12,668,000) - reflecting the net unrealised profit on the revaluation of investments of £10,908,000 (2021: £12,306,000) and the realised profit on disposal of investments of £2,867,000 (2021: nil)

· Fair value of our equity portfolio increased by 24% to £39,712,000 (2021: £31,982,000) after disposals of £3,659,000 (2021: nil) and additions of £1,378,000 (2021: £347,000)

· Profit before tax increased 6% to £10,879,000 (2021: £10,242,000)

· Cash balances at 30 June 2022 of £4,368,000 (2021: £1,992,000)

Corporate highlights

· Generated cash proceeds of £6.5 million selling shares in portfolio company Exscientia following its successful listing on the Nasdaq Global Select Market at a valuation of $2.9 billion in October 2021. Post year-end the Company has sold another tranche of shares in Exscientia generating a further £3.4 million in cash with Frontier IP retaining 782,400 shares

· Strengthened Board of Directors with the appointment of Professor Dame Julia King, Baroness Brown of Cambridge DBE FREng FRS as an independent Non-Executive Director in October 2021. Julia is Chair of the Group's Remuneration Committee and is also a member of the Audit Committee

· Awarded an Innovation and Business Development Award by the UK Department for International Trade in Portugal for work with AquaInSilico

Portfolio highlights

· Exscientia became our first portfolio company to IPO, listing on the Nasdaq Global Select Market in October 2021

· A year of concentrating on our existing portfolio. Companies across the portfolio made robust commercial and technical progress during the year, demonstrating their value to prospective partners and investors in difficult economic and market conditions. The Group believes that previous steps taken to strengthen management teams are bearing fruit

· Portfolio continues to mature with several companies reaching inflection points, reflected by their success in raising funds and developing stronger industry engagement. Fundraisings and grant awards included:

o  Exscientia raised a total of $510.4 million through an initial public offering and concurrent private placement through listing on the Nasdaq Global Select Market in October 2021 with a valuation of $2.9 billion. In the six months to 30 June 2022, Exscientia delivered on major new and existing collaborations, and advanced its pipeline programmes

o  CamGraPhIC raised £1.6 million through an equity funding round. Post year end, the company raised a further £1.26 million

o  Cambridge Raman Imaging is coordinating CHARM, an international project awarded €3.3 million by the European Innovation Council. The company also raised £1.1 million through an equity funding round

· Strong commercial and technical progress made by a number of portfolio companies, including developing new and existing industry partnerships:

o  Exscientia entered into a $70 million collaboration agreement with the Bill & Melinda Gates Foundation and a strategic research collaboration with Sanofi under which the company received an upfront cash payment of $100 million with the potential for a further $5.2 billion in milestone payments and tiered royalties

o  The Vaccine Group achieved a significant milestone in development of its COVID-19 vaccine with pig trials showing it potentially offered broad immunity against the disease and current and future variants

o  Celerum launched its first commercial product and won its first customer, Colin Lawson Transport

o  Fieldwork Robotics started commercial trials of its raspberry harvesting agricultural robots - robot-harvested raspberries now available in the shops

o  Post year end, Cambridge Raman Imaging started testing a commercial prototype of its graphene-based Raman imaging device, developed in collaboration with Motic, a leading manufacturer of medical imaging devices

o  Pulsiv completed a first close of a new fundraising in July 2022 which was reflected in an increase in the value of the Group's holding in Pulsiv by £4,996,000 over the year to 30 June 2022. Adam Westcott joined Pulsiv as Chief Financial Officer during the year

o  Elute Intelligence announced the appointment of Steve Cable as Chief Executive Officer post year end.

ENQUIRIES

Chairman's Statement

Performance

Frontier IP and its portfolio companies produced a resilient performance during the year to June 2022. These numbers represent solid progress, following as they do from an exceptional year to 30 June 2021, when pre-tax profits rose by 145 per cent, and despite the significant uncertainties caused by political, market and economic turbulence we saw during the period. I am very pleased with the response from the Group and across the portfolio.

The highlight of the year was unquestionably the successful listing of Exscientia on the Nasdaq Global Select Market in October 2021. The company raised a total of $510.4 million through an upsized initial public offering and a concurrent private placement with a valuation of $2.9 billion. Following the IPO, we sold a quarter of our equity holding in the company, raising £6.5 million, followed by a further £3.4 million share sale after the year end.

Although Exscientia shares have suffered since listing, closing at $10.89 on 30 June and $8.21 on 30 September 2022 as part of the broader market and technology sell off, with the knock-on impact on growth in the fair valuation of our portfolio at the year end, I am very confident about the prospects for Exscientia. The company is exceptionally well-capitalised, ending its own first half to June with more than $730 million of cash. It has forged partnerships with some of the world's biggest pharmaceutical companies, including Bristol Myers Squibb and Sanofi, and institutions such as the Bill & Melinda Gates Foundation.

I am delighted to say the rest of the portfolio performed well. The drop in Exscientia's valuation was partially offset by valuation increases elsewhere. Successful equity funding rounds included CamGraPhIC, which raised £1.6 million in September 2021, and a further £1.26 million in August this year. Our other graphene spin out Cambridge Raman Imaging raised £1.1 million and is coordinating a pan-European project awarded €3.3 million by the European Innovation Council. Neil goes into more detail in his statement about some of the challenges facing not just Frontier IP but the world more broadly in his statement. But I remain excited by the possibilities latent within our portfolio and the ability of the companies to meet tangible, real-world demands and confront some of the biggest challenges we face head on. Pulsiv, CamGraPhIC, Nandi Proteins, Alusid, The Vaccine Group, and others all have significant potential. In short, they are developing new technologies to solve major problems and tackling issues around climate, energy, food, water and health. 

I am delighted to say we continued to strengthen our team during the year. Professor Dame Julia King, Baroness Brown of Cambridge DBE, FREng and FRS, joined as a non-executive director during the year, an appointment that was made and announced at the time of our results last year

We have seen our operations in Portugal growing, where we saw encouraging progress from InSignals Neurotech, AquaInSilico and the pan-European Emporia 4KT project, which has won backing from the European Union for a 16-month extension to improve technology transfer across the Atlantic seaboard's Blue Economy following a successful first phase.

 We added two new companies during the year, and we continue to concentrate on the commercial development and scale up of our existing companies. Across the portfolio, commercial and technical progress has been good, and I am looking forward to updatinge you next year on progress. Our pipeline of opportunities looks exciting, and we are hopeful of incorporating new companies in the current financial year.

Our governance

Good governance is vital for long-term sustainable growth, and we strive to achieve the highest standards for a business our size. We have adopted the Quoted Companies Alliance Corporate Governance Code, introduced in April 2018. To see more details about how we apply the principles of the Code, see the Our Governance section of this report and our website: https://www.frontierip.co.uk/about/governance/

Results

I am delighted with how the Group performed in the year. The growth in the fair value of our portfolio to £39,712,000 was reflected in net assets per share of 88.5p and we achieved our first exit in the period under review from a partial sale of our holding in Exscientia.

For the year to 30 June 2022, total revenue and other operating income increased by 11% to £14,104,000 (2021: £12,668,000) as a result of a net unrealised profit on the revaluation of investments of £10,908,000 (2021: £12,306,000), of which £4,996,000 was due to the increase in fair value of Pulsiv, and the realised profit on part-disposal of our holding in Exscientia of £2,867,000 (2021: nil). This part-disposal provided cash proceeds of £6,525,000 which, along with proceeds of £3,433,000 from realisations since 30 June 2022, has significantly strengthened our balance sheet.

Outlook

The market and economic outlook is difficult to predict given the number and scale of the domestic and global problems now looming. However, we are well capitalised and our portfolio companies are addressing fundamental global challenges. We are confident about our prospects for the coming year and beyond.

Andrew Richmond

Chairman

26 October 2022

Chief Executive Officer's Statement

Frontier IP enjoyed a successful year to 30 June 2022. The fair value of our equity portfolio rose 24% to £39,712,000 and, while profit before tax of £10,879,000 was only 6% ahead of the prior year, net assets per share increased from 69.8p to 88.5p. I am delighted to say we are in a strong financial position. 

The Group closed the year with more than £4 million cash on the balance sheet and has subsequently raised a further £3.4 million by selling a further part of our stake in Exscientia. The Group is well placed to weather any market or economic disruption and to take advantage of opportunities as they arise.

And we believe there might well be opportunities. The shorter-term outlook is highly uncertain, geopolitical risks abound, and there are fundamental challenges to be addressed - including climate change, energy, water, food and health. But history shows that disruption can drive technology adoption and our portfolio is positioned strongly to meet the challenges we all face.

To go into more detail:

The shorter-term outlook is uncertain. I warned at the half year that the environment was highly unpredictable: in the shorter term, the war in Ukraine has compounded risks already apparent, such as supply chain pressures and energy prices. The COVID-19 pandemic has yet to end. Inflation is rising. Central banks are raising interest rates and starting to unwind quantitative easing. Economists are warning of the UK entering recession during the first half of next year (2023). Underlying all these are the potential for macro shocks with the potential to send markets into a tailspin.

In terms of geopolitics, there are several areas of concern. Prospects for the United States are uncertain. Jobs data looks positive, but there has been sharp contraction in mortgages and consumer confidence has struck new lows. Corporate earnings have held up, but the outlook is uncertain - and the strong dollar is pump-priming inflation and energy prices worldwide. China's economy, so long a motor for global growth, is looking bleak. The country is facing severe demographic challenges as a result of the one child policy, which has led to an ageing population with the proportion of young dominated by men. Conditions in the property sector, a substantial part of GDP, are worsening, and its economy is also affected by very tough COVID-19 lockdowns, energy and climate, which has led to industry shutdowns. There is also the growing risk of debt defaults across lower-to-middle-income countries.

In Europe, the Ukraine war is obviously a major source of risks and heightens uncertainty. But the biggest fear of international investors is the possibility of another Italian debt crisis because the country's bonds are widely used as collateral in financial markets - which are hugely over leveraged. As for the UK, aside from inflation, there is rising industrial unrest, reflecting squeezed finances. House prices are under pressure.

Then there are the other risks: climate change is having an impact - again, on energy, on food production, and on water; and of course, the COVID-19 pandemic is still continuing, and the probability of future pandemics is greater than assumed as bacteria and viruses adapt to the changing environment.

All these factors might affect the appetite of investors for risk, in turn leading to greater pricing pressures on start-up and early-stage companies.

Now, I am not saying all of the above will happen. However, these are the risks as we seem them, and it is prudent to consider and warn of them.

First, our balance sheet is strong. I promised shareholders we would not seek to raise further funding from them. This is still the case. Our business model is also extremely capital efficient. So far, we have generated nearly £10 million in cash through selling shares in Exscientia. The original cost of those shares was less than £2,000.

On a broader note, it is important to realise that crises boost innovation. The example of war driving step-changes in technology is well known: what is less well known is that economic crises can have the same effect. The 1929 crash and subsequent Great Depression saw a sharp upturn in technology adoption. US productivity rose during the 1930s, following gains in the 1920s. Indeed, one economist has written the period 1929 to 1941 was the most technologically progressive decades in America's history. Significant advances were made in areas such as electrical machinery and equipment (which in turn boosted industrial productivity) chemical engineering, aeronautics, power generation and distribution, and engineering - and before World War II made an impact.

We expect the fundamental problems around climate, energy, food, water and health to spur a similar drive towards new technologies to solve them. And our portfolio is well placed to take advantage. The nature of our business model and the focus on industrial partnerships mean we avoid more volatile consumer-facing sectors such as fintech and delivery services.

So, to examples. On the climate and energy side, I am excited about the potential for Pulsiv, which I believe has the potential to become a major green technology company. By offering major improvements in the efficiency with which electricity is converted - by reducing wasted energy from about 50 per cent to under 10 per cent - the technology could significantly reduce the strain on national power grids if adopted at a great enough scale. The components required are cost effective, can be fitted into smaller, lighter form factors, and used in an enormous range of devices. Pulsiv offers a compelling proposition - better products at the same price for their customers and lower bills for consumers.

Alusid also helps to save energy and water in one of the most energy-intensive manufacturing sectors - tile making. Its novel manufacturing processes to make tiles and architectural services from recycled industrial waste uses a third less energy and 75 per cent less water than used to make conventional tiles.

CamGraPhIC's graphene-based photonics are able to transmit digital data and communications more rapidly than equivalent technologies and use at least 70 per cent less energy. Celerum's software improves logistics' efficiency and has the potential to reduce the carbon emitted by truck fleets.

AquaInSilico is developing software to improve wastewater treatment across a range of industries, recovering more valuable resources, such as phosphorus, while making water quality better. It is part of a United Nations Development Programme Ocean Innovation Challenge in Cape Verde. Molendotech's unique testing kits are able to test water for harmful bacteria in a matter of minutes on site compared to the days currently taken.

Two of our companies are directly involved in food. Nandi Proteins' ingredients replace chemical E-numbers, fat and gluten in a wide range of processed foods, including meat replacements. Fieldwork Robotics now has machines operating commercially to harvest raspberries in Portugal, a boost to horticultural productivity.

On health, Exscientia is already established as a world leader in using artificial intelligence (AI) to accelerate the discovery of new drugs. Cambridge Raman Imaging is using graphene-based ultrafast lasers and AI to develop faster and better ways to diagnose and monitor tumours and other diseases, while The Vaccine Group is developing new types of vaccines, including those with the potential to prevent future pandemics.

These companies are only a snapshot of our portfolio, and I am looking forward to updating on progress on other companies in future announcements.

Finally, to reflect development of our portfolio as it matures and companies evolve, we have added a further two clusters to the existing four. The additional ones are energy and the Blue Economy. Crises beget opportunities. Our cluster-based approach means we are focused on the areas where we see the greatest opportunity and our well-financed balance sheet means we are positioned to take advantage.

Although we cannot say for how long the current uncertainties will exist, or how bad things might get, we remain confident in the future prospects for the business.

And, as always, I would very much like to thank you, our shareholders, and other stakeholders, for your continued support.

Neil Crabb, Chief Executive Officer

26 October 2022

Key Performance Indicators and Alternative Performance Measures

The Key Performance Indicators and Alternative Performance Measures for the Group are:

Note 1 - The total initial equity in portfolio companies is not an IFRS measure. It is used by Directors to measure the total percentage equity stakes received in all new spin-out companies during the year. It does not reflect holdings in individual spin-outs and does not include equity received through post spin-out investment. For 2022 it is the aggregate percentage holding from two new spin-out companies during the year.

We are pleased to report that the Group achieved increases in all Key Performance Indicators and Alternative Performance Measures, despite the difficult economic and market conditions.

Exscientia's IPO in October 2021 enabled us to sell part of our holding in the second half of our financial year generating proceeds of £6,525,000 and a realised profit of £2,867,0000. Since 30 June 2022 we have sold further shares in Exscientia for £3,433,000 and still hold 50% of our original holding. The value of the Group's equity investments increased to £39,712,000 (2021: £31,982,000) with net assets increasing to £48,699,000 (2021: £38,421,000). Profit after tax for the Group for the year to 30 June 2022 was £10,230,000 (2021: £9,566,000) after a deferred tax charge of £649,000 (2021: £676,000). This result includes a realised profit on disposal of investments of £2,867,000 (2021: nil), an unrealised profit on the revaluation of investments of £10,908,000 (2021: £12,306,000) and reflects a decrease in services revenue to £329,000 (2021: £362,000) and greater administrative expenses of £3,104,000 (2021: £2,171,000) primarily due to bonuses of £480,000 and an increase in personnel.

Operational Review

Frontier IP delivered a solid performance for the year, given considerable market and economic uncertainties.

We ensured that we were well capitalised, generating £6.5 million in cash by selling shares in Exscientia following its successful listing on the Nasdaq Global Select Market at a valuation of $2.9 billion in October 2021. This capital base helps to ensure we are in a good position to take advantage of any opportunities we see arising in the current environment, including investing directly in our portfolio companies when appropriate. After the year end, we generated a further £3.4 million in cash by selling another tranche of Exscientia shares. We retain half our holding in the company.

Companies across the portfolio continued to make good technical and commercial progress, reflecting the potential value they provide to industry partners and investors. Steps taken to strengthen management teams in previous years are paying off. Several companies successfully raised funds.

Further validation to the approach we take to nurturing early-stage businesses came when the UK Department for International Trade in Portugal awarded us an Innovation and Business Development Award for the work we were doing with AquaInSilico. Emporia 4KT, a pan-European project where we are one of 17 partners received further grant funding and a 16-month extension to build on the work already undertaken during the initial three years. The project brings together government, academics and business to create and support start-up companies in the Blue Economy across Europe's Atlantic seaboard.

As a people focussed business, we took steps to expand our team and to ensure we attract and retain the best people. We strengthened our Board of Directors with the appointment of Dame Julia King, Baroness Brown of Cambridge DBE FREng FRS as an independent Non-Executive Director and expanded our team with three new hires during the year.

Post period-end our Remuneration Committee commissioned an external review of the Group's remuneration framework. The outcome of this review, conducted by Remuneration Consultants Ellason LLP, is set out in detail in the Remuneration Committee Report.

Portfolio Review

Frontier IP strives to develop and maximise value from its portfolio. We do so by taking founding stakes in companies at incorporation and then working in long-term partnerships with shareholders, academic and industry partners.

As part of our sustainability agenda, we have mapped our portfolio companies to relevant United Nations Sustainability Development Goals (UN SDGs). All equity holdings are as at 30 June 2022.

Core portfolio

Alusid: Frontier IP stake: 38.9 per cent

Alusid creates beautiful, premium-quality tiles, tabletops and other surfaces by recycling industrial waste ceramics and glass, most of which would otherwise be sent to high-impact landfill

The company has successfully scaled up its technology for mass production on industry-standard manufacturing equipment. Its innovative formulations and processes use 35 per cent less energy, reducing CO2 emissions, and up to 75 per cent less water than used to make tiles conventionally.

Alusid was also one of only five companies globally shortlisted for the Climate Solutions Partnership's Cities of Tomorrow Challenge run by the World Wildlife Fund and HSBC to pitch to potential investors.

During the year, new customers for the company's batch-made products included the Stonehenge Visitor Centre and BBC Bristol.

UN Sustainable Development Goal mapping: SDG 9, industry, innovation and infrastructure; SDG 12, responsible consumption and production.

UN Sustainable Development Goal mapping: SDG 9, industry, innovation and infrastructure; SDG 12, responsible consumption and production.

Amprologix: Frontier IP stake: 10.0 per cent

Amprologix was created to commercialise the work of Mathew Upton, Professor of Medical Microbiology at Plymouth's Institute of Translational and Stratified Medicine.

The company continued to make progress with development of its new family of antibiotics based epidermicin, which is derived from bacteria found on human skin, to tackle antimicrobial-resistant MRSA and other superbugs. Ingenza, a leader in industrial biotechnology and synthetic biology, is also a shareholder and is working with Amprologix to develop and scale up the technology.

COVID-19 has heightened interest in other threats to human health globally. Among these is the danger from antimicrobial resistance, named as a top 10 threat to global health by the World Health Organisation.

UN SDG mapping: SDG 3, good health and well-being

AquaInSilico: Frontier IP stake: 29.0 per cent

AquaInSilico is developing sophisticated software tools able to understand and predict how biological and chemical processes unfold in different operating conditions.

These can be used to optimise wastewater treatment across many industries, including municipal wastewater treatment plants, oil groups, brewers, pulp, paper and steel makers, food processing and waste recovery businesses.

The Portuguese company was selected in 2021 to receive $250,000 as an Ocean Innovator through the United Nations Development Programme's Ocean Innovation Challenge. The first year of the two-year project saw the project make highly promising progress in developing tools to help partners in protecting and conserving one of the world's most diverse marine environments around the Cape Verde archipelago. The next stage will see the tools applied to reduce the amount of nutrients entering the sea and improve water quality for the local population, particularly for agricultural use.

During the year, the work Frontier IP did in collaboration with AquaInSilico resulted in the Group winning an Innovation and Business Development Award from the UK Department for International Trade in Portugal.

UN SDG mapping: SDG 6, clean water and sanitation, SDG 12, responsible consumption and production, SDG 14, life below water

Cambridge Raman Imaging: Frontier IP stake: 26.8 per cent

Our first graphene spin out, Cambridge Raman Imaging (CRI) is developing Raman imaging technology based on graphene-based ultra-fast lasers, to detect and monitor tumours. The company was formed as a result of a partnership between the University of Cambridge and the Politecnico di Milano in Italy.

The main application creates digital images of patient cells and tissue. It then employs Artificial Intelligence (AI) based analysis of chemical signatures for accurately differentiating between healthy tissue and diseased tissue in the patient samples, augmenting or replacing subjective diagnosis of samples by histopathologists. The technology removes the need for chemical staining - eliminating a major contributor to sample variation seen between one lab and the next.

During the year, the company raised £1.1 million through a second equity funding round and promoted appointed Chief Technology Officer Matteo Negro to Chief Executive Officer. A project CRI is coordinating was also selected to receive a €3.3 million grant from the European Innovation Council. Called CHARM, the project aims to develop a high-speed, low-cost medical device to transform cancer diagnosis and treatment.

A commercial prototype of a Raman imaging microscope in collaboration with leading medical imaging manufacturer Motic has been developed.

UN SDG mapping: SDG 3 good health and well-being 

CamGraPhIC : Frontier IP stake: 20.8 per cent

CamGraPhIC develops graphene-based photonics for high-speed data and telecommunications. Graphene photonics are seen as a key enabler for 5G technologies by the company's industrial partners.

Initial applications are high-speed optical transceivers. In laboratory conditions these have worked at 100Gb per second, around twice the speed of equivalent technologies, and across multiple wavebands. They are projected to consume at least 70 per cent less energy. Other uses include 6mm wave, which has the potential to transmit data at up to 1 terabyte per second, high-performance computing and in networks able to meet the demands of processor intensive artificial intelligence applications.

The company raised £1.6 million through an equity funding round during the year to accelerate development and scale up of the technology. After the period close, CamGraPhIC raised a further £1.26 million and announced that Sir Michael Rake, the former chair of BT Group and an investor in the company, will be joining its board of directors.

UN SDG mapping: SDG 9, industry, innovation and infrastructure, SDG 11, sustainable cities and infrastructure

Celerum: Frontier IP stake: 33.8 per cent

Celerum is developing novel artificial intelligence to improve the operational efficiency of logistics and supply chains.

The company's technology is based on nature-inspired computing, which develops software and algorithms based on natural processes and behaviours, such as those exhibited by ant colonies and fish schools. A project conducted on behalf of Highlands and Islands Enterprise across food and drink supply chains in northern Scotland, showed it has the potential to cut carbon emissions by up to 40 per cent if suppliers and logistics firms are willing to work together to share loads.

Progress during the year was highly encouraging. The company launched its first commercial product, Truck Logistics System, for companies operating small to medium sized road haulage fleets, and won its first commercial customer, Aberdeen-based Colin Lawson Transport.

UN SDG mapping: SDG 9, industry, innovation and infrastructure

Des Solutio: Frontier IP stake: 25.0 per cent

Des Solutio is developing safer and greener alternatives to the toxic solvents currently used to extract active ingredients by the pharmaceutical, personal care, household goods and food industries.

It does this by creating new methods to use Natural Deep Eutectic Solvents, found in a huge array of plants, to replace toxic organic solvents, such as ethanol, employed currently. This means it is contributing to the environmentally sound management of chemicals, and reducing their release to air, water and soil. The company is still at an early stage but is already generating industry interest.

UN SDG mapping: SDG 9 industry, innovation and infrastructure; SDG 12, responsible consumption and production

Elute Intelligence: Frontier IP stake: 41.2 per cent

Elute's software tools are designed to help users intelligently search, compare and analyse complex documents by mimicking the way people read. There are a huge range of potential applications, from searching patents and contracts, to detecting evidence of plagiarism, collusion and copyright infringement. The company's tools help to enhance research, support improved technological capabilities and innovation.

After the year end, Elute announced the appointment of Steve Cable as Chief Executive Officer.

UN SDG mapping: SDG 9, industry, innovation and infrastructure

Exscientia: Frontier IP stake: 1.0 per cent

Exscientia, a spin out from the University of Dundee, became the first in our portfolio to IPO, raising total gross proceeds of $510million through a public offer and private placements with SoftBank and the Bill & Melinda Gates Foundation. The IPO, priced at the top end of the estimated range, valued the company at $2.9 billion. During the year, Exscientia also announced a $70 million collaboration with the Bill & Melinda Gates Foundation to develop novel therapeutics against Coronavirus and other viruses with pandemic potential. The Bill & Melinda Gates Foundation is investors in the company.

Now based in Oxford, Exscientia is a world leader in artificial intelligence-driven drug discovery. It is the company behind the first AI-created drugs to enter human clinical trials, taking years off traditional drug discovery processes.

Following the IPO, Exscientia announced a collaboration and licence agreement with one of the world's biggest pharmaceutical companies Sanofi. The company received an upfront cash payment of $100 million and the deal has the potential for a further $5.2 billion in total milestone payments and tiered royalties. It also entered into a partnership with the University of Oxford Target Discovery Institute to create Xcellomics, a programme to expedite early-stage drug discovery for unmet medical needs.

UN SDG mapping: SDG 3, good health and well-being

Fieldwork Robotics: Frontier IP stake: 24.5 per cent

Raspberries picked by Fieldwork Robotics' robot harvesting technology went on sale in supermarkets after the company launched commercial operations. The company deployed two robots to Portugal, where the fruit can be harvested throughout the year, as part of a commercial field trial to prove the robots could work autonomously alongside humans. Fieldwork's focus is now on making the robots faster and scaling up production to get more robots into the field.

The company is also working with Bonduelle, a leading vegetable producer, on a three-year project to develop a cauliflower harvesting robot.

Robotic fruit and vegetable harvesting technology has the potential to improve agricultural productivity, reduce food waste by more accurate picking and minimising human contact, and result in better quality jobs, with harvesting labour replaced by skilled robot operators. There is also potential for cutting carbon emissions through reduced need for migrant labour.

UN SDG mapping: SDG 2, zero hunger; SDG 12 responsible consumption and production

InSignals Neurotech: Frontier IP stake: 33.0 per cent

InSignals Neurotech made significant progress during the year with its novel technology to analyse the motor symptoms of Parkinson's disease and other neurological disorders. The company is developing wireless to measure precisely motor symptoms, such as wrist rigidity, in real time to help surgeons and neurologists assess the extent of the disease. Initial prototypes were designed to help identify the best locations to place implants in the brain. However, an improved version can now be used to monitor symptoms more broadly for disease tracking and to understand better how patients are responding to treatment. A multi-centred clinical trial was established to test the devices.

The spin out from the Portuguese Institute for Systems and Computer Engineering, Technology and Science ("INESC TEC"), with the support of São João University Hospital, part of the University of Porto.

UN SDG mapping: SDG 3 good health and well-being

Molendotech: Frontier IP stake: 13.0 per cent

Molendotech continued work on its innovative rapid pathogen detection technology. SirenBW, a kit to test bathing water for faecal matter based on Molendotech's proprietary bacterial detection technology, is now commercially available. The kit, which can be used on site, cuts testing times from up to two days to under 30 minutes because samples do not need to be sent to a laboratory, enabling environmental agencies and other authorities to assess water quality swiftly.

The company has also developed a novel method to detect specific pathogenic bacteria, and the investment will enable further development of this technology for new markets, including the food industry, where it has the potential to extend shelf life and reduce food waste. This work is being undertaken in collaboration with industry partners.

UN SDG mapping: SDG 6, clean water and sanitation; SDG 12 responsible consumption and production

Nandi Proteins: Frontier IP stake: 20.1 per cent

Nandi Proteins is scaling up commercial products based on its technology to create a wide range of customised ingredients based on vegetable and animal proteins. These functional proteins can be used to replace undesirable ingredients, such as fat, gluten, E-number additives in processed foods, or those that people do not want to consume - for example, by replacing animal proteins with vegetable proteins.

The company has gained major industrial traction and is making significant commercial progress with food groups in several applications. These include projects using animal proteins to replace fat and meat, using vegetable proteins to replace egg whites in meat alternatives and to improve the taste and texture of gluten-free products, and proteins to replace chemical binders and emulsifiers in plant-based alternative meats and baked goods.

Nandi's technology has the potential to contribute to more sustainable agriculture and food production by supporting the plant-based alternative meat industry and by reducing chemical ingredients in processed food. Cutting fat in affordable processed foods will help to make them less harmful.

UN SDG mapping: SDG 2, end hunger; SDG 12, responsible consumption and production

NTPE: Frontier IP stake: 48.0 per cent

NTPE is developing cellulose-based eco-friendly, low-cost, low-power paper-based electronics to replace silicon in some electronic applications. Called Paper-E, the novel technology means electronic circuits, sensors and semiconductors can be printed onto any cellulose-based paper. Paper-based energy harvesters, such as solar cells, can be included in the circuits.

The company is focusing on a range of potential applications, including a book-E concept to produce cheap and accessible educational tools to teach children about electronics. Longer-term health applications include diagnostic sensors for use in health and food, smart packaging and paper-based sensors for use in very remote environments.

Cellulose is natural, sustainable and recyclable material. Its use can help reduce the severe negative impact of silicon mining, use and disposal. The technology is still at an early stage of development.

UN SDG mapping: SDG 12, responsible consumption and production

PoreXpert: Frontier IP stake: 15.0 per cent

PoreXpert, a software and consultancy firm, has developed novel software and methods to model the voids within porous materials and how gases, liquids and colloidal suspensions behave within them.

Applications include helping companies understand and exploit the nature of oil and gas reserves to improve the efficiency of exploration and extraction, supporting industry efforts to reduce their impact on the environment. It is also being used to help maximise the lifespan of the UK's Advanced Gas Cooled nuclear reactors, which generate 20 per cent of the national energy requirement, without greenhouse gas emissions.

UN SDG mapping: SDG 7, affordable and clean energy; SDG 12, responsible consumption and production

Pulsiv: Frontier IP stake: 18.3 per cent

Pulsiv's technology has the potential to make a profound impact on the energy sector. It cuts the amount of energy consumed by devices, therefore reducing the strain on power grids, and can boost the output of photovoltaic solar cells. 

This is because about half the electricity used by devices is wasted because of inefficient power conversion. That's why converters heat up in operation. Pulsiv's novel technology converts electricity much more efficiently - in tests it wastes only about 10 per cent of the energy. Furthermore, its new power conversion techniques can be incorporated in smaller, lighter and more cost-effective designs. So the technology has the potential to reduce strains on power grids and cut costs for manufacturers and bills for consumers.

The technology can be used in nearly all mains-powered products, battery chargers, lighting applications, electric vehicles, portable power tools and DC motors. Not only does it convert electricity from mains to device more efficiently, it also works from device to mains, significantly improving the efficiency of renewable sources. The company is also working on a solar microinverter to maximise the output from photovoltaic solar cells. 

Pulsiv enjoyed a year of solid technical and commercial progress. It is building relationships with major manufacturers, including those in consumer electronics and the solar sector.

UN SDG mapping: SDG 7, affordable and clean energy; SDG 13, climate action

The Vaccine Group: Frontier IP stake: 17.0 per cent

The Vaccine Group is creating a wide range of vaccines based on a novel herpesvirus-based platform. Its core focus is on preventing the spread of zoonotic and economically damaging diseases.

During the year, the company achieved a major milestone in the development of its next generation COVID-19 vaccine for use in animals. Trial data from pigs showed strong T cell responses to SARS-CoV-2, the virus that causes COVID-19, as well as the more divergent SARS-CoV-1. This means the vaccine has the potential to provide broad immunity against current and future variants.

There have also been highly promising developments through the company's first commercial collaboration agreement with ECO Animal Health Group and The Pirbright Institute to develop vaccines for porcine respiratory and reproductive syndrome.

Other vaccines under development include those for African swine fever, bovine tuberculosis, bovine mastitis, streptococcus suis, Ebola and Lassa fever. To date, the company and its international partners have been awarded more than £9 million in grant funding from the UK, US and Chinese governments.

UN SDG mapping: SDG 2, end hunger; SDG 3 good health and well-being

Core Portfolio Summary at 30 June 2022

The Group holds equity stakes in 6 further portfolio companies. The combined value of these holdings was £571,000, equivalent to 1.4% of the fair value of the Group's equity investments at 30 June 2022.

Financial Review

Key Highlights

During the second half of the year the Group sold approximately 28% of its holding in Exscientia generating proceeds of £6,525,000 and realising a gain of £2,867,000. The value of the remaining holding in Exscientia was £10,132,000 at 30 June 2022. The value of the Group's equity investments increased to £39,712,000 (2021: £31,982,000) with net assets increasing to £48,699,000 (2021: £38,421,000).

Profit after tax for the Group for the year to 30 June 2022 was £10,230,000 (2021: £9,566,000) after a deferred tax charge of £649,000 (2021: £676,000). This result includes a realised profit on disposal of investments of £2,867.000 (2021: nil), an unrealised profit on the revaluation of investments of £10,908,000 (2021: £12,306,000) and reflects a decrease in services revenue to £329,000 (2021: £362,000) and greater administrative expenses of £3,104,000 (2021: £2,171,000) primarily due to bonuses of £480,000 and an increase in personnel.

Revenue

Total revenue and other operating income for the year to 30 June 2022, which is the aggregate of services revenue, realised gain on the disposal of investments and unrealised gain on the revaluation of investments, increased 11% to £14,104,000 (2021: £12,668,000). Revenue from services decreased 9% to £329,000 (2021: £362,000). The Group realised a gain on disposal of investments of £2,867,000. This gain arose on the sale of part of the Group's holding in Exscientia which was valued at £3,659,000 at 30 June 2021 and which generated proceeds of £6,525,000. Unrealised gains on revaluation of equity investments of £10,011,000 (2021: £12,191,000) included an increase of £4,996,000 in the value of Pulsiv. Unrealised gains included net unrealised profit on the revaluation of debt investments of £898,000 (2021: £115,000).

Administrative Expenses

Administrative expenses increased 43% to £3,104,000 (2021: £2,171,000). The increase is primarily due to increased employee costs which included bonuses of £480,000.

Share Based Payments

Share based payments decreased 11% to £329,000 (2021: £368,000). No options were granted during the year and some options lapsed.

Earnings Per Share

Basic earnings per share were 18.60p (2021: 17.47p). Diluted earnings per share were 17.53p (2021: 16.62p).

Statement of Financial Position

The principal items in the statement of financial position at 30 June 2022 are financial assets at fair value through profit and loss comprising equity investments of £39,712,000 (2021: £31,982,000) and debt investments of £2,981,000 (2021: £2,320,000). The carrying value of these items is determined by the Directors using their judgement when applying the Group's accounting policies. The matters taken into account when assessing the fair value of the portfolio companies are detailed in the accounting policy on investments. The movement during the year in equity and debt investments is detailed in notes 13 and 14 to the financial statement respectively.

The Group had goodwill of £1,966,000 at 30 June 2022 (2021: £1,966,000). The considerations taken into account by the Directors when reviewing the carrying value of goodwill are detailed in Note 10 to the financial statements. 

The Group had net current assets at 30 June 2022 of £5,201,000 (2020: £2,379,000) reflecting primarily an increase in cash balances of £2,376,000. The current assets at 30 June 2022 include trade receivables of £376,000 which are more than 90 days overdue. The portfolio company debtors are in the process of raising funds and the directors are confident that, depending on the amounts raised, the amounts due to the Group will be paid in either cash or equity.

Net assets per share

Net assets of the Group increased to £48,699,000 at 30 June 2022 (30 June 2021: £38,421,000) resulting in net assets per share of 88.5p (30 June 2021: 69.8p).

Cash

The Group's cash balances increased during the year by £2,376,000 to £4,368,000 at 30 June 2022. Operating activities consumed £3,006,000 (2021: £1,466,000) reflecting an increase in administrative expenses and an increased in trade receivables and other current assets. Investing activities generated £5,382,000 having consumed £1,692,000 in 2021. This reflected proceeds on disposal of part of our holding in Exscientia of £6,525,000 and the purchase of equity and debt investments of £1,141,000 (2022: £1,689,000) in eight of our portfolio companies.

Principal Risks and Challenges affecting the Group

The specific financial risks of price risk, interest rate risk, credit risk and liquidity risk are discussed in note 1 to the financial statements. The principal broader risks - financial, operational, cash flow and personnel - are considered below.

The key financial risk in our business model is the inability to realise sufficient income through the sale of our holdings in portfolio companies to cover operating costs and investment capital. This risk has been mitigated through the sale of shares in Exscientia, our most valuable holding at 30 June 2022, through disposing parts of our stake during the year and after the year end. The other principal financial risk of the business is a fall in the value of the Group's portfolio. With regards to the value of the portfolio itself, the fair value of each portfolio company represents the best estimate at a point in time and may be impaired if the business does not perform as well as expected, directly impacting the Group's value and profitability. This risk is mitigated as the number of companies in the portfolio increases. The Group continues to pursue its aim of actively seeking realisation opportunities within its portfolio to reduce the requirement for additional capital raising.

The principal operational risk of the business is management's ability to continue to identify spin out companies from its formal and informal university relationships, to increase the revenue streams that will generate cash in the short term and achieve realisations from the portfolio.

Early-stage companies are particularly sensitive to downturns in the economic environment. There are currently several areas of concern that could affect the UK and wider global markets and economy. Short-term risks include the war in Ukraine and its impact on supply chains and energy prices, and the continuing COVID-19 pandemic. Inflation and interest rates are rising. Longer-term risks include uncertainties in the US economy, particularly around mortgages and consumer confidence, and China, which is facing demographic challenges, pressures in its property sector, and from COVID-19 lockdowns, energy and climate, which has led to industrial closures. In Europe, aside from Ukraine, there is the potential for an Italian debt crisis.

Any economic downturn would mean considerable uncertainty in capital markets, resulting in a lower level of funding activity for such companies and a less favourable exit environment. The impact of this may be to constrain the growth and value of the Group's portfolio and to reduce the potential for revenue from advisory work. The Group seeks to mitigate these risks by maintaining a strong balance sheet, relationships with co-investors, industry partners and financial institutions, as well as controlling the cash burn rate in portfolio companies.

In terms of COVID-19, the remaining risks to the Group are operational: Frontier IP and portfolio company employees may contract the virus and be unavailable for work for extended periods of time. The Group seeks to mitigate these risks by maintaining a safe working environment and ensuring portfolio companies have considered and addressed risks.

Changes to the basis on which IP is licensed in the Higher Education sector might lead to reduced opportunity or a need to vary the business model. Any uncertainty in the sector may have an impact on the operation of the Group's commercialisation partnerships in terms of lower levels of intellectual property generation and therefore commercialisation activity. The Group seeks to mitigate these risks by continuing to seek new sources of IP from a wide range of institutions both within and outside of the UK.

The Group is dependent on its executive team for its success and there can be no assurance that it will be able to retain the services of key personnel. This risk is mitigated by the Group through recruiting additional skilled personnel and ensuring that the Group's reward and incentive framework aids our ability to recruit and retain key personnel. We expanded our team during the year and, post period-end, commissioned an external review of our remuneration framework.

By order of the Board

Neil Crabb

Director

26 October 2022

In line with the Remuneration Committee's role to ensure the on-going appropriateness and relevance of the Group's remuneration policy, Ellason LLP was appointed to conduct an external review of the Group's remuneration framework with the aim that it continues to reinforce long-term value creation, capture Group and individual performance, and support growth by enhancing the Group's ability to attract and retain the best people. The review highlighted several areas where the Committee believes revisions are required, from FY2023, to ensure competitiveness with the market and to formalise a structure which provides a more consistent remuneration package as the Group scales-up its operations. The Committee has had a very constructive consultation with the Group's largest shareholders and it is grateful for their input.

Salary

The review indicated that salaries and pay overall for the executive directors are significantly behind the market. The Remuneration Committee generally aims to target salaries at market median for high-performing and experienced executives, and is therefore proposing to transition the executive director salaries to levels more competitive with the market over the next 2 years. The first increase will be in FY23, with full-time equivalent salaries raised to £200,000 for the CEO, and to £160,000 for each of the CFO, CCO, and COO. The Committee is expecting further increases in FY24 which are likely to be less than the increase in FY23 and will disclose these in the relevant directors' remuneration report.

Annual Bonus

We intend to adopt a more formalised cash bonus structure which provides for potential annual awards to eligible employees, including the executive directors. Our business model means that the availability of cash to pay bonuses will be dependent on cash being raised through asset realisations, and so it is proposed that the bonus opportunity in any financial year will be dependent on this activity. 

A Group-wide bonus pool will be funded each year, based on the Group's cash generation: in a year where no asset realisation occurs, the maximum annual bonus will be limited to c.30% of salary for an executive director (and lower levels for other staff); conversely, in a year when an asset realisation occurs the maximum annual bonus will be limited to 100% of salary for an executive director. Allocation of the pool will be based on a range of factors, including contribution to Group performance, achievement of specific objectives, seniority and tenure. In any given year, whether or not there has been an asset realisation, bonuses would only be paid where the Group determines there is a sufficient surplus to the medium term operating cash requirement.

LTIP

Over recent years, our main long-term incentive has been regular grants of options, the most recent of which have comprised both approved and unapproved options, with vesting based on continued employment over 3 years, and with exercise prices set at nominal price (10p) or at the prevailing share price. Whilst this historical arrangement has been simple, the Remuneration Committee believes that a more targeted arrangement which focuses vesting on specific outcomes will better suit the Group's ambitions in the future.

Going forward, the primary long-term incentive will be an 'LTIP' based on annual awards of performance shares (structured as nominal cost options, 'NCOs'), with vesting linked 70% to NAV per share and 30% to Total Shareholder Return measured over 3 financial years. Vesting will also be subject to a discretionary underpin, assessed by the Remuneration Committee, to be used to reduce vesting, if required, in the event that the recorded NAV/TSR performance is not consistent with the Remuneration Committee's view on the Group's underlying performance. Performance against NAV and TSR targets set for each LTIP cycle will be disclosed in the relevant remuneration report.

This revision will require some changes to the current unapproved option plan rules to enable awards as above. A key change will be to the provision around dilution, which currently permits dilution of up to 15% of share capital over 10 years, but with a limit of 5% for awards with 'discounted' exercise prices (which captures NCOs). This secondary limit will be removed on the basis that, going forward, the vesting of LTIP awards, whilst structured as NCOs, will no longer be linked only to continued employment but also to stretching targets around NAV per share growth and TSR.

LTIP participants will include the executive directors and other Group employees; allocations will be made annually from an aggregate award pool which is limited in size to ensure sufficient shares are available to grant in future years without exceeding the Group's dilution limits. Our modelling suggests that LTIP awards to the executive directors may have a grant value of c.65-75% of salary in FY2023 - the actual value will depend on the share price at grant. The LTIP will include an individual grant limit of 200% of salary in any financial year, but this level would require a significant increase from the current share price to be breached.

The first awards to be granted under the LTIP will be made as soon as practicable during FY 2023.

Option awards may also be granted to Group employees under the Group's Approved Company Share Option Plan, to the extent an individual has headroom under the relevant limits.

An analysis of remuneration by director is given in Note 6 of this announcement .

Neil Crabb's, Jacqueline McKay's, James Fish's and Matthew White's service agreements are subject to a three-month notice period. It is planned that these Contracts of Service will be reviewed during FY2023 including a proposal, from the remuneration review, to increase the notice period to six months.

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2022

All of the Group's activities are classed as continuing.

There is no other comprehensive income in the year (2021: nil).

Consolidated Statement of Financial Position

At 30 June 2022

Consolidated Statements of Changes in Equity

For the year ended 30 June 2022

Group

Consolidated Statements of Cash Flows

For the year ended 30 June 2022

Notes to the Financial Statements

1. Financial risk management

(a) Market risk

Interest rate risk

As the Group has no borrowings it only has limited interest rate risk. The impact is on income, debt investments and operating cash flow and arises from changes in market interest rates. Cash resources are held in floating rate accounts.

Price risk

The Group is exposed to equity securities price risk because of equity investments classified on the consolidated statement of financial position as financial assets at fair value through profit and loss. The maximum exposure is the fair value of these assets which is £39,712,000 (2021: £31,982,000) of which quoted equity investments comprise £10,132,000 (2021: £nil). Equity investments are valued in accordance with the Group's accounting policy on equity investments. Management's monitoring of and contact with portfolio companies provides sufficient information to value these companies and the Board regularly reviews their progress, prospects and valuation. Information on reasonable possible shifts in the valuation of equity investments is provided in note 13 to the financial statements.

(b) Credit risk

The Group's credit risk is primarily attributable to its trade receivables, other debtors and cash equivalents. The Group's current cash and cash equivalents are held with two UK financial institutions, the Bank of Scotland plc and Barclays Bank plc, both of which have a credit rating of "P1" from credit agency Moody's, indicating that Moody's consider that these banks have a "superior" ability to repay short-term debt obligations. The concentration of credit risk from trade receivables and other debtors varies throughout the year depending on the timing of transactions and invoicing of fees. Details of major customers to the Group are set out in Note 4. Details of trade receivables and other current assets are set out in note 15. Management's assessment is aided through representation on the Board and/or through providing advisory services to the companies.

The maximum exposure to credit risk for, trade receivables, other current asset and cash equivalents is represented by their carrying amount.

(c) Capital risk management

The Group is funded by equity finance only. Total capital is calculated as 'total equity' as shown in the consolidated statement of financial position. The Group's objectives for managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to manage the cost of capital. In order to maintain the capital structure, the Group may issue new shares as required. The Group currently has no debt. There were no changes in the Group's approach to capital management during the year.

(d)  Liquidity risk

The Group seeks to manage liquidity risk to ensure sufficient liquidity is available to meet the requirements of the business and to invest cash assets safely and profitably. The Group's business model is to realise cash through the sale of investments in portfolio companies and in the absence of such realisations the Group would plan to raise additional capital. The Board reviews available cash to ensure there are sufficient resources for working capital requirements and investments. At 30 June 2022 and 30 June 2021 all amounts shown in the consolidated statement of financial position under current assets and current liabilities mature for payment within one year.

2. Critical accounting estimates and assumptions

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgements.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below:

(i) Valuation of investments

In applying valuation techniques to determine the fair value of unquoted equity investments the Group makes estimates and assumptions regarding the future potential of the investments. As the Group's unquoted investments are in seed, start-up and early-stage businesses it can be difficult to assess the outcome of their activities and to make reliable forecasts. Given the difficulty of producing reliable cash flow projections for use in discounted cash flow valuations, this technique is applied with caution. Adjustments made to fair value are, by their very nature, subjective and determining the fair value is a critical accounting estimate. Reasonable possible shifts, which themselves are estimates, are included in Note 13 and show a reasonable possible shift for the total unquoted equity investments of 23% (2021: 29%) being £9,070,000 (2021: £9,249,000) from a total value of £39,712,000 (2021: £31,982,000). In applying valuation techniques to determine the fair value of debt investments the Group makes estimates and assumptions regarding the time to repayment or conversion, discount rate and credit risk. A 25% increase in the time to repayment or conversion reduces the value of debt investments from £2,981,000 to £2,951,000 and a 25% increase in the discount rate reduces the value of the debt investments from £2,981,000 to £2,941,000. Where warrants are attached to a debt instrument, the fair value is determined using the Black-Scholes-Merton valuation model. The significant inputs to the model are provided in note 14. The price at which debt investments were made is 94% of the fair value of debt investments at 30 June 2022 (2021: 95%).

(ii) Impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment, in accordance with the stated accounting policy. The recoverable amount is determined using a value in use value model which requires a number of estimations and assumptions about the timing and amount of future cash flows. As future cash flows relate primarily to proceeds from sale of investments, these estimates and assumptions are subject to a high degree of uncertainty. Note 10 describes the key assumptions and sensitivity applied.

(iii) Consideration of credit losses

The matters taken into account in the recognition of credit losses include historic current and forward-looking information. The Group's exposure to credit losses is with companies from its own portfolio whose ability to settle their debts is primarily dependant on their ability to raise capital rather than their current trading. The age of debt is not considered in assessing credit loss as the outcome is expected to be binary. The debt is also concentrated in a small number of companies; five companies account for 98% of trade receivables at 30 June 2022. Management has in-depth knowledge of these companies and is providing the fundraising service for four of them. The Group's history of credit loss is negligible and therefore management focus on the factors which impact the ability of these companies to successfully raise capital and a probability of default as a result of the failure to raise capital is applied to determine the expected credit loss Details of the expected credit loss are provided in note 15.

The Group believes that the most significant judgement areas in the application of its accounting policies are establishing the fair value of its unquoted equity investments and the consideration of any impairment to goodwill. The matters taken into account by the Directors when assessing the fair value of the unquoted equity investments are detailed in the accounting policy on investments.

The considerations taken into account by the Directors when reviewing goodwill are detailed in Note 10. In addition, the Directors judge that the Group is exempt from applying the equity method of accounting for associates in which it has interests of over 20% as they consider the Group to be similar to a venture capital organisation and elects to hold such investments at fair value in the statement of financial position.

IAS28 Investments in Associates and Joint Ventures permits investments held by entities which are similar to venture capital organisations to be excluded from its scope where those investments are designated, upon initial recognition, as at fair value through profit and loss.

3. Revenue from services

During the year the Group earned revenue from the provision of services to portfolio companies and university partners as follows:

4. Major customers

During the year the Group had five major customers that accounted for 86% of its revenue from services (2021: five customers accounted for 76%). The revenues generated from each customer were as follows:

5. Administration expenses

Expenses included in administrative expenses are analysed below.

6. Directors and employees

The average number of people employed by the Group during the year was:

All employees with the exception of Jacqueline McKay are employed by Frontier IP Group plc. Jacqueline McKay is employed by the subsidiary Frontier IP Limited and her costs are shown in the table of directors' remuneration below.

The key management of the Group and the Company comprise the Frontier IP Group Plc Board of Directors. The remuneration of the individual Board members is shown below.

Remuneration comprises basic salary, pension contributions and benefits in kind, being private health insurance and life assurance. The type of remuneration is constant from year to year. Ad hoc bonuses may be paid to reward exceptional performance and bonuses were paid during the year to 30 June 2022. Such bonuses are decided by the Remuneration Committee. Share options are also awarded to employees from time to time. The granting of share options to individual employees is determined taking into account seniority, commitment to the business and recent performance.

The total remuneration for each director is shown below.

Amounts in £'000

7. Taxation

A reconciliation from the reported profit before tax to the total tax charge is shown below:

-

The UK corporation tax rate was previously enacted to reduce to 17% from 1 April 2020. However, the Finance Act 2020, which was substantively enacted on 11 March 2020, repealed this rate reduction and the corporation tax rate has remained at 19% from 1 April 2020. The Finance Act 2021 received Royal Assent on 10 June 2021 which has enacted an increase in the UK corporation tax rate to 25% from 1 April 2023. The closing deferred tax assets and liabilities have been calculated at a blended rate of 21.75%, on the basis that this is the rate at which those assets and liabilities are expected to unwind.

Deferred Tax

8. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to the shareholders of Frontier IP Group Plc by the weighted average number of shares in issue during the year.

Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has only one category of dilutive potential ordinary shares: share options. A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market value share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

9. Tangible fixed assets

10 Goodwill

The Group conducts an annual impairment test on the carrying value of goodwill based on the recoverable amount of the Group as one cash generating operating unit. The recoverable amount is determined using a value in use model. The net present value of projected cash flows is compared with the carrying value of the Group's investments and goodwill. Projected cash flows are based on management approved budgets for a period of three years and key assumptions over a further seven years. When determining the key assumptions, management has used both past experience and management judgement, but as future cash inflows are derived primarily from the realisation of investments, these assumptions are subject to a high degree of uncertainty. The key assumptions used in the model were rate of return 33%; average yearly realisations 6.7%; annual growth in trading income 8%; annual growth in the cost base 11%; discount 11%. The Board considers that a reasonable possible change in the rate of return or in the discount rate would cause the carrying amount of the cash generating unit to exceed its recoverable amount. A decrease in the rate of return from 33% to 18% and an increase in the discount rate from 11% to 29% would cause the recoverable amount to equal the carrying amount. The Board considers that the recoverable amount of the Group as one cash generating operating unit is greater than its carrying value.

11. Categorisation of Financial Instruments

All financial liabilities are categorised as other financial liabilities and recognized at amortised cost.

All net fair value gains in the year are attributable to financial assets designated at fair value through profit or loss. (2021: all net fair value gains were attributable to financial assets designated at fair value through profit or loss.)

12. Investment in subsidiaries

The Company has investments in the following subsidiary undertakings.

The registered office of all subsidiaries registered in Scotland is c/o CMS Cameron McKenna Nabarro Olswang LLP, Saltire Court, 20 Castle Terrace, Edinburgh EH1 2EN.

The registered office of FIP Portugal, Unipessoal, Lda is Rua Alfredo Guisado No 39, Sala 11, 1500-030 Lisboa, Portugal.

13. Equity investments

Equity investments are valued individually at fair value in accordance with the Group's accounting policy on investments. All but one of the Group's equity investments are unquoted and these have been categorised as being level 3, that is, valued using unobservable inputs. All gains and losses relate to assets held at the year end, and the fair value movement has been shown in the income statement as other operating income.

The table below sets out the movement during the year in the value of unquoted equity investments by the valuation matrix stages described in the accounting policy on equity investments:

The table below provides information about equity investment fair value measurements.

(See the accounting policy on investments for a description of the valuation matrix stages)

The percentage reasonable possible shift for each stage is the blended percentage reasonable possible shift of each company at that stage which are based on the Directors' assessment of the level of uncertainty attached to the valuation inputs.

The valuation of the Group's investment in Exscientia (Stage 6) at 30 June 2022 was £10,132,000, 26% of the Group's total equity investments and 21% of its net assets at 30 June 2022. During the year, the Group sold part of the investment in Exscientia for £6,525,000 realising a gain of £2,867,000. The increase in the value of the Group's remaining holding in Exscientia over the year to 30 June 2022 was £581,000, 5% of the Group's net unrealised profit on the revaluation of investments and 5% of profit before tax for the year to 30 June 2022. The valuation is the bid price on the Nasdaq exchange at 30 June 2022.

Significant unobservable inputs:

The valuation of the Group's investment in Pulsiv (Stage 4) at 30 June 2022 was £9,083,000, 23% of the Group's total equity investments and 19% of its net assets at 30 June 2022. The increase in the value of the Group's holding in Pulsiv over the year to 30 June 2022 was £4,996,000, 46% of the Group's net unrealised profit on the revaluation of investments and 46% of profit before tax for the year to 30 June 2022. The significant inputs into the valuation of the Group's holding in Pulsiv included the price of an investment in July 2022.

The valuation of the Group's investment in The Vaccine Group (TVG) (Stage 3) at 30 June 2022 was £5,554,000, 14% of the Group's total equity investments and 11% of its net assets at 30 June 2022. The increase in the value of the Group's holding in TVG over the year to 30 June 2022 was £1,008,000, 9% of the Group's net unrealised profit on the revaluation of investments and 9% of profit before tax for the year to 30 June 2022. The significant inputs into the valuation of the Group's holding in TVG included an assessment of the progress made in the nine projects in progress at 30 June 2022 since the most recent funding round in January 2020, the growth in valuation of vaccine companies over the period and a discounted cash flow model. The company's activities on the projects funded by the US, UK and Chinese governments remain on track and have met the milestones agreed with the funders. Post-year end animal trials were completed on a transmissible Lassa fever vaccine, believed to be the first of its kind in the world. The lab based trial demonstrated: a) effective transmission of the vaccine from directly vaccinated to unvaccinated animals, and b) a significant reduction in the shedding of Lassa fever virus from both directly and indirectly vaccinated animals when infected (compared to unprotected infected animals). Trials were also carried out on the Streptococcus suis vaccine developed for use in pigs; the initial trials in rabbits (a well-defined animal model) demonstrated a good immune response to vaccination. This specific vaccine constructs and others developed by TVG will be tested in pigs by project partners during the current financial year. These activities are an indicator of the positive progress made during the period.

Whilst TVG has a growing portfolio of projects, each of the projects are individually high risk but also potentially high reward for TVG. It is therefore challenging to accurately value TVG given the material impact of success or failure in any one of these projects. This remains particularly challenging at this point in time as the ongoing COVID-19 environment has seen a strong growth in the valuations of vaccine companies, particularly those that are specifically targeting COVID-19. The current valuation has been corroborated by discounted cash flows which have been risk adjusted for probability of success using rates typically seen in animal health vaccine development. A 25% reduction in the royalty rate, market penetration, success rate or cost per dose would reduce the valuation of the Group's investment in TVG by 26% while a 25% decrease in the discount rate would increase the valuation by 47%. The high risk/reward nature of TVG's projects, the difficulty in estimating future cash flows and the high level of judgement involved mean there is a risk of material adjustment to the valuation.

Equity investments are carried in the statement of financial position at fair value even though the Group may have significant influence over those companies. This treatment is permitted by IAS28, Investments in Associates. At 30 June 2022 the Group held an economic interest of 20% or more in the following companies:

The nature of these companies' business is provided in the Portfolio Review section of the Strategic Report where the holding carries a value.

14. Debt investments

Debt investments are loans to portfolio companies to fund early-stage costs, provide funding alongside grants and bridge to an equity fundraise. Loans ranging from £100,000 to £175,000 were made to four companies during the period. All debt investments are categorised as fair value through profit or loss and measured at fair value. The Group uses valuation techniques that management consider appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs The price at which the debt investment was made may be a reliable indicator of fair value at that date but management consider the financial position and prospects for the portfolio company borrower when valuing debt investments at subsequent measurement dates.

Certain debt investments carry warrants granting the option to purchase shares. The exercise price is generally the price of shares issued at the first equity fundraising following the grant and the period of exercise is generally at any time from the first equity fundraising to an exit event. The fair value of the warrants is determined using the Black-Scholes-Merton valuation model. The significant inputs into the model for each warrant were the exercise price, the current share price valuation, volatility of 70% (2021: 70%), expected life of between six months and five years and an annual risk-free interest rate of 2.07% (2021: 0.04%). The value of warrants included in debt investments at 30 June 2022 is £827,000 (2021: £60,000)

The movement of debt investments during the year is set out below:

All debt investments are classed as non-current. Certain debt instruments have conversion or repayment terms dependent on the amount and timing of an equity fundraising by the portfolio company borrower. The exercise of a conversion right would reclass the debt investment as a non-current equity investment. The expectation is to exercise the right to repayment, however there is uncertainty over the timing and amount of equity fundraisings. Furthermore, notwithstanding the right to repayment being triggered, the Group may decide, depending on the circumstance at the time, to defer repayment or convert into equity for the benefit of the portfolio company borrower in which the Group also holds an equity stake.

15. Trade receivables and other current assets

Trade receivables are amounts due from portfolio companies for services provided with net amounts recorded as revenue in the consolidated statement of comprehensive income. The expected credit losses are estimated by reference to the financial position and specific circumstances of the portfolio companies, by reference to past default experience and by assessment of the current and forecast economic conditions. The nature of the services provided to portfolio companies means the Group has in-depth knowledge of the companies' prospects both for trading and raising capital and the number of companies with past due receivables is small enabling a full assessment of recoverability by company. The Group also considers if a general provision for expected loss through applying the historical rate of portfolio company failures is material. £22,000 of trade receivables at 30 June 2022 have been recovered post year-end (2021: £34,000). Of the remaining £464,000, £104,000 is due from Fieldwork Robotics (2021: £104,000), £101,000 from Elute Intelligence (2021: £76,000), £43,000 from Alusid (2021: £87,000) and £120,000 from Nandi Proteins Ltd (2021: £26,000). The Group's history of credit loss is negligible and therefore management focus on the factors which impact the ability of its debtor companies to successfully raise capital and a probability of default as a result of the failure to raise capital is applied to determine the expected credit loss

Receivables from Group undertakings carry interest of 2.0% above base rate (2021: 2.0%).

16. Trade and other payables

17. Share capital and share premium

18. Reserves

The reverse acquisition reserve was created on the reverse takeover of Frontier IP Group Plc. The fair value of equity-settled share-based payments is expensed on a straight-line basis over the vesting period and the amount expensed in each year is transferred to the share-based payment reserve. The amount by which the deferred tax asset arising on the intrinsic value of the outstanding share options differs from the cumulative expense is also transferred to the share-based payment reserve. Included in retained earnings are unrealised profits amounting to £35,233,000. The movement in reserves for the years ended 30 June 2022 and 2021 is set out in the Consolidated and Company Statement of Changes in Equity.

19. Share options

Frontier IP has three option schemes. Under the Frontier IP Group Plc Employee Share Option Scheme 2011 - Amended 26 March 2018, both enterprise management incentive options and unapproved options are granted. No payment is required from option holders on the grant of an option. The options are exercisable starting three years from the date of the grant with no performance conditions. The scheme runs for a period of ten years but no new options can be granted as the Group has ceased to be a qualifying company for EMI purposes No options were granted during the year.

Movements in the number of share options outstanding and their related weighted average exercise prices were as follows:

Of the 4,986,726 outstanding options (2021: 5,030,181) 2,836,000 had vested at 30 June 2022 (2021: 2,134,000). The vested options have a weighted average exercise price of 26.53p.

Share options outstanding at the end of the year have the following expiry date and exercise prices: