Mercia Asset Regulatory News (MERC)

Mercia Technologies PLC

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

Half Year Results

Increasing portfolio commercial traction

Mercia Technologies PLC (AIM: MERC), the national investment group focused on the identification, creation, funding and scaling of innovative technology businesses with high growth potential from the UK regions, today announces its half year results for the six months ended 30 September 2018.

Direct investment portfolio highlights

· £9.2million net invested in 11 portfolio companies during the period (H1 2017: £9.7million invested in nine portfolio companies), including one new direct investment:

o £1.0million into Warwick Acoustics to continue its automotive product development

o £1.5million into Impression Technologies as part of a syndicated round

o £1.2million into Smart Antenna Technologies to enable continuing expansion in China and the supply of its first volume antenna to Xiaomi

o £1.5million into Voxpopme to fund the company's continued overseas expansion

o £0.5million into Locate Bio, a new direct investment targeting the regenerative medicine and medical device markets

· Significant commercial milestones achieved by direct investment portfolio companies include:

o Oxford Genetics - won its largest multi-million pound contract to date with a global ecommerce provider of reagents and tools to the research and clinical community

o nDreams - won its largest multi-million pound contract to date with a high-profile global technology company

o Aston EyeTech (trading as Eyoto) - won its largest multi-million pound contract to date with one of the fastest growing optical retailers in the world

o VirtTrade - signed partnership agreements with both Formula 1 and Valiant Comics to develop digital collectibles content

· Balanced portfolio by sector with 99% of the portfolio value spread across 20 companies in four technology sectors

Managed funds' developments

· Funds under management at the period end were £394.9million (H1 2017: £336.5million):

o £216.0million of available capital to invest over the next 4-5 years

o Circa 170 portfolio companies within the venture managed funds

o Invested £19.4million via the managed funds during the period

o Started investing from the Group's newest fund mandate win - the £27.0million North East Venture Fund

Financial highlights

· Direct investment portfolio fair value increased to £77.8million (H1 2017: £64.7million)

· Net fair value gains of £2.6million (H1 2017: £3.0million)

· Net assets of £125.2million (H1 2017: £123.6million)

· Unrestricted cash and short-term liquidity investments of £38.3million (H1 2017: £48.6million)

· Net assets per share of 41.3 pence (H1 2017: 41.1 pence)

· Revenue increased to £5.3million (H1 2017: £4.8million)

· Net expenses reduced to £0.7million (H1 2017: £0.9million)

· Operating profit of £1.8million (H1 2017: £1.8million)

· Profit after taxation for the period £1.9million (H1 2017: £1.4million)

· 33.3% increase in earnings per Ordinary share to 0.64p (H1 2017: 0.48p).

Post period end developments

· £2.0million invested into another new direct investment, W2 Global Data Solutions

· Second close of Voxpopme syndicated funding round

Mark Payton, Chief Executive Officer of Mercia, commented:

"The commercial progress being made across the portfolio is accelerating. With Mercia's increasing scale, we are now seeing a greater number of attractive investment opportunities for our managed funds, which bodes well for the future direct investment pipeline as we seek to build a sustainable investment model. We therefore remain confident in our ability to deliver strong returns for shareholders and fund investors alike over the medium term."

An analysts' briefing will be held at 9:30 am this morning at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN.

An audio webcast of this briefing will subsequently be available later on through the following link:

http://webcasting.buchanan.uk.com/broadcast/5c00f660504bf54698397832

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

Enquiries:

About Mercia Technologies PLC

Mercia is a national investment group focused on the funding and scaling of innovative technology businesses with high growth potential from the UK regions. Mercia benefits from 19 university partnerships and 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' initially nurtures businesses via its third-party funds (now with circa £400million under management) and then over time Mercia can provide further funding to the most promising companies by deploying direct investment follow-on capital from its own balance sheet. Since its IPO in December 2014, Mercia has invested over £69million across its direct investment portfolio.

Chief Executive's review

Mercia Technologies' business model was conceived with the aim of generating investment returns from investing in technology-led businesses (often university derived), over the medium term. The Group is now almost four years into its strategic plan of building the leading provider of complete capital (being venture, growth and debt funding) to the UK regions. Since our IPO in December 2014, Mercia's direct investment portfolio IRR is circa 15%. With an average investment period of approximately two years across the direct investment portfolio as a whole, the commercial progress now being achieved is very encouraging.

By focusing initially on the provision of finance through Mercia's managed funds, the Group is able to identify, help build and de-risk those managed fund portfolio companies ahead of providing, on a selective basis, scale-up balance sheet capital. Since the start of this financial year, Mercia has received circa 1,800 business plans and made on average 10 managed fund investments per month across the Midlands, the North of England and Scotland. Mercia is increasingly seen as the go-to regional investor and in its relatively short time on AIM is now recognised as one of the most active venture investors in the UK.

Mercia's sector head specialists work alongside the funds' portfolio investment teams helping to drive investee company growth. By combining both commercial and investment expertise Mercia is able to identify and help accelerate those, often young, businesses which have the most potential. Our direct investment approach identifies scale-up opportunities from the four key technology sectors which we consider to be fast-growth segments playing to the strengths of the UK's research base, matched with global market disrupting opportunities:

· Software & the Internet - artificial intelligence, cybersecurity, software as a service, analytical tools and adtech

· Digital & Digital Entertainment - virtual reality, augmented reality, gaming entertainment and serious games

· Electronics, Materials, Manufacturing/Engineering - energy, communications, high-value electronics and manufacturing applications

· Life Sciences & Biosciences - diagnostics, digital health, medical devices and synthetic biology

Direct investment portfolio

The direct investment portfolio continues to grow in both strength and depth. During the six-month period under review, four businesses announced significant commercial contracts, three of which were each multi-million pounds in value.

In September 2018 Mercia made an initial investment of £0.5million into a new direct investment, Locate Bio, and post period end invested £2.0million into a further new direct investment, W2 Global Data Solutions. Both of these new balance sheet investments came from the Group's managed funds' venture portfolio of circa 170 businesses.

University partners and managed funds

Although circa 6% of all deal flow opportunities were from university sources, approximately 25% of Mercia's managed venture fund deals completed are university spinouts. Our university partnerships therefore continue to play an important role in helping to uncover IP-rich investment opportunities from academic institutions. Mercia has 19 university partners, one of the largest university networks in the UK.

Our geographic reach and deal flow networks continued to grow during the period under review as a result of the new £27.0million North East Venture Fund mandate. This builds on the substantial fund mandate wins of the last financial year as reported on in our 2018 Annual Report.

Financial performance

Reflective of the increased investment activity arising from the greater funds under management, revenues grew 10.4% to £5.3million (H1 2017: £4.8million). Valued in accordance with International Private Equity and Venture Capital Valuation Guidelines, the direct investment portfolio increased in value by 17.7% to £77.8million. This included net new direct investments totalling £9.2million and net unrealised fair value gains of £2.6million. Net asset value ("NAV") per share was 41.3 pence (H1 2017: 41.1 pence).

Outlook

The UK is consistently among the top four countries in the world for entrepreneurs to set up in business. With circa 70% of high-growth firms located in the UK regions whilst circa 80% of venture capital is focused in London, we are confident that Mercia's regional investment model is a valuable differentiator.

Mercia's Board measures progress against the Group's strategic objectives through our ability to achieve four key metrics; (i) sourcing compelling deal flow in a competitive market, (ii) net fair value increases by our portfolio of direct investments, through the commercial progress of those businesses together with syndicated follow-on investment rounds, (iii) generating direct investment cash realisations and (iv) minimising NAV erosion through a continued focus on net expense minimisation. I am pleased to report solid progress against all four of these metrics in the first half of this financial year and I am optimistic of continued positive news flow for the remainder of this period and beyond.

Taken together, the Group's Board and senior management team represent circa 23% of the Group's issued share capital. This degree of ownership by those responsible for the successful execution of the Group's strategy underpins the alignment of key stakeholder interests and confidence in our ability to deliver strong returns for shareholders and fund investors alike over the medium term.

Dr Mark Payton

Chief Executive Officer

Chief Investment Officer's review

Mercia Technologies continues to execute its investment strategy, sourcing innovative and disruptive businesses through both its managed funds' activities and university partnerships. We continue to access some of the most exciting investment opportunities that the UK regions have to offer, using our locally-based teams across the Midlands, the North of England and Scotland.

During the six-month period under review we have continued to expand our investment teams and build out our team of direct investment portfolio-focused specialists operating as Mercia's 'Platform'. Within the Platform we have recruited talent management, corporate finance, legal and data analyst expertise. We believe that this investment will reap rewards in the future by helping the direct investment portfolio companies to realise their full value.

Through the Platform we will identify and appoint the most relevant industry experts as non-executive directors to our portfolio companies who will challenge their strategic direction, ensuring that each portfolio company is agile and able to capitalise on new commercial opportunities as they arise. We also want to give ourselves and our portfolio companies the greatest chance of building the best management teams, selecting the most appropriate co-investors, utilising our own in-house legal expertise and making informed market decisions. We are also building on our ability to help create and shape businesses alongside the best managers in their specialist technology sectors, to exploit market gaps that we have identified. There are already several examples of businesses in the direct investment portfolio which have all started this way including nDreams, Oxford Genetics, Medherant, Faradion and sureCore.

Whilst the Group's direct investment portfolio is still relatively young, it has made considerable overall progress during the six-month period with nDreams, Oxford Genetics and Aston EyeTech (trading as Eyoto) amongst others securing major new commercial contracts. 

Within our Software & the Internet sector, Intechnica, Intelligent Positioning and Voxpopme continue to demonstrate impressive revenue growth in their respective businesses. Within Life Sciences & Biosciences, Medherant continues to make solid technical and commercial progress and Aston EyeTech announced a significant commercial contract for product design, development and manufacture with one of the largest, most successful and fastest growing optical retailers in the world. The Native Antigen Company once again grew both its revenues and profit and as a result paid its first dividend. Within Electronics, Materials, Manufacturing/Engineering we invested further capital in five of our direct portfolio companies in support of their continued commercial and technological progress. Within the Digital and Digital Entertainment sector we remain pleased with the revenue growth at nDreams. Both VirtTrade and Soccer Manager have shown encouraging signs of commercial progress, but currently still require our close ongoing operational and financial support to reach their potential. The external validation of our portfolio, through the significant commercial deals announced during the period under review, demonstrate the increasing value creation potential held within it and is something that we are pleased to be able to increasingly communicate to our shareholders.

In the six months to 30 September 2018 we invested £9.2million net in 11 companies, building out Mercia's position in a number of our top assets and one new direct investment, Locate Bio ("Locate"). Locate, a spinout from the University of Nottingham, is a specialist regenerative medicine and medical device company based in Nottingham, developing a novel drug delivery system (TAOS®) and associated gene editing technologies (IntraStem) with an initial focus on orthopaedic applications. Its lead product is a treatment for osteomyelitis, for which Locate has partnered with a major European medical device developer.

As at 30 September 2018 the direct investment portfolio was held at a fair value of £77.8million which is up 17.7% from £66.1million as at 1 April 2018. This increase in value was driven by both the £9.2million of net new capital invested and £2.6million of net upward fair value movements.

The £2.6million net fair value increase comprised £3.2million of fair value gains, being uplifts for Faradion and Intechnica based upon third-party indications of market value, an uplift at Voxpopme following a successful syndicated third-party investment round and an uplift at The Native Antigen Company as its profitable trading progresses. Downward movements totalled £0.6million. A reduction of £0.5million resulted from a fall in the share price of AIM listed Concepta Plc and the remaining £0.1million reduction was against one of our small direct investments where we declined to provide further funding.

Commercial progress by four of the Group's top 20 direct investments, which account for £30.9million (39.7%) of the fair value of the direct investment portfolio, is discussed in more detail below. 

nDreams

As at 30 September 2018, Mercia held a 45.6% interest in nDreams at a fair value of £13.0million (H1 2017: £13.0million). Mercia first invested in the business in March 2014 through its managed funds before making its first direct balance sheet investment in December 2014. No new investment was made during the period and the investment is held at the price of the last equity investment round.

nDreams provides creative content for the interactive virtual reality ("VR") entertainment market, developing and publishing games and experiences on VR devices. The company was originally founded to provide content for the PlayStation Home platform but pivoted in 2014 to take advantage of the significant investment in VR headset technology by leading companies such as Oculus, Samsung, HTC, PlayStation and others. The company is capitalising on this rapidly growing sector which PwC estimates will be worth £1.2billion by 2022.

nDreams is already delivering over 50% growth in annual revenues even without the widely predicted significant acceleration in market adoption as the cost of hardware continues to decrease. Revenues are expected to continue to increase following the announcement that the company had secured its largest multi-million pound contract to date, with a high-profile global technology company. Post period end, the company launched its games and experiences for the fast-growing location-based entertainment ("LBE") market, where VR is being brought to consumers at arcades and shopping centres.

Oxford Genetics

As at 30 September 2018, Mercia held a 40.5% interest in Oxford Genetics at a fair value of £9.1million (H1 2017: £7.0million). Mercia first invested in the business through its managed funds in July 2013 before making its first direct balance sheet investment in December 2015. No new investment was made during the period and the investment is held at the price of an anticipated syndicated investment round.

Oxford Genetics is a specialist designer and developer of biological molecules such as proteins, viruses and cells within the growing synthetic biology market. The company operates in a market which Allied Market Research estimates to be worth circa $38billion by 2020, with cell line development services alone having an estimated value of $2billion. It has achieved a significant commercial milestone during the period, having secured its largest multi-million pound contract to date with a global ecommerce provider of reagents and tools to the research and clinical community. The business continues to attract considerable commercial and strategic interest and we are very pleased with its continuing progress.

Impression Technologies

As at 30 September 2018, Mercia held a 31.4% interest in Impression Technologies at a fair value of £4.6million (H1 2017: £3.1million). Mercia first invested in Impression Technologies through its managed funds in May 2014 and made its first balance sheet investment in July 2015. During the period Mercia invested £1.5million and the investment is held at the price of that syndicated investment round.

Located in Coventry and based on intellectual property developed at both the University of Birmingham and Imperial College London, Impression Technologies has a proprietary Hot Form Quench (HFQ®) technology for manufacturing complex, high-strength and lightweight aluminium components for the automotive, aerospace and industrial sectors.

The company already has parts in production on Aston Martin and Lotus cars and is making significant commercial and technological progress following the APC7 grant award earlier this year with a world class consortium including Gestamp, one of the world's largest suppliers of automotive body and chassis components.

Post period end, the company announced a partnership with Novelis, the world leader in aluminium rolling and recycling. The agreement will explore ways to increase the broader adoption of aluminium using HFQ® technology. These partnerships provide further validation of the significant potential that HFQ® technology presents to disrupt the automotive and aerospace industries, where lightweighting is of increasing importance.

Intelligent Positioning

As at 30 September 2018, Mercia held a 28.8% interest in Intelligent Positioning at a fair value of £4.2million (H1 2017: £2.5million). Mercia made its first balance sheet investment in November 2015. No new investment was made during the period and the investment is held at the price of the last syndicated investment round.

Intelligent Positioning's software platform Pi Datametrics combines search ranking data, market intelligence and analysis of large datasets to inform business-critical decision making. It has a large client base of blue chip customers, generating high margin recurring revenues which have grown by 62.0% in the last two years as a result of running analytics on behalf of over 150 brands.

In the six-month period under review the company has continued to grow its monthly recurring revenues, adding a number of new customers including Dyson (intelligence for a new platform rollout), GoCompare (market intelligence for strategic development) and the gaming business LeoVegas (intelligence for strategic market development).

These direct investments are just four examples of the significant commercial traction now being achieved by the portfolio as a whole and underpins Mercia's continuing belief that the direct investment portfolio will deliver significant value over the medium term.

Post period end developments

Since the period end we have committed £2.0million into a new direct investment, W2 Global Data Solutions ("W2"). W2 is a software as a service business providing real-time identity verification services to prevent fraud and money laundering in a market estimated to grow from $14.4billion in 2016 to $33.2billion in 2021. The company targets global firms in regulated, government and business communities and is primarily focused on selling to the gaming, payments and foreign exchange markets on multi-year revenue contracts.

With more than twenty years' experience investing in early-stage technology businesses I have learned to both expect challenges and accept that not everything will go as planned, but I have always been prepared to take swift action when appropriate. We have recently seen this within our own portfolio with Edge Case Games ("ECG"). Its relaunch of Fractured Space during the summer did not generate the revenue traction which we were expecting. We therefore turned our attention to finding the best alternative outcome for Mercia and the future success of ECG. After much work by the management team and our sector head, Mike Hayes, the business was sold post period end in an asset and royalty deal to Wargaming. Over £1.0million has been returned to Mercia up-front, with deferred consideration of up to $10million possible over time. Whilst I am disappointed that ECG did not make it alone, I am pleased that we have given the ECG team the best possible home and ourselves the best possible chance of significant future returns from this asset.

Finally, our third-party managed funds (encompassing our venture, growth and debt funds) are all performing well against their mandates. The newest fund covering the North East region was launched and made its first investments during the six-month review period. We are now investing at a steady rate of circa £25million per annum from our venture funds, creating a healthy pipeline of investments from which we can help shape business models, strategies and management teams, before making selective new direct balance sheet investments. 

Julian Viggars

Chief Investment Officer

Chief Financial Officer's review

Further positive progress has been achieved during the period under review, with both direct portfolio net fair value increases and a further reduction in net expenses (being total revenue less all staff and administrative expenses), compared with the corresponding period last year.

Revenue increased 10.4% to £5.3million (H1 2017: £4.8million). The Group's revenue increase was largely derived from the growing quantum of funds under management. H1 2017 revenue had included one-off performance-related fund management fees totalling £0.9million, so the underlying revenue increase this half year has been 34.5% compared with the corresponding period last year.

Staff and administrative expenses increased by 5.3% to £6.0million (H1 2017: £5.7million). The cost base increase arose mainly from the recruitment of additional investment staff to manage and deploy the substantial new fund mandate wins of the past 12 months. One-off costs in H1 2017 associated with the performance-related fund management fees referred to above totalled £0.4million, so the underlying cost base increase this half year has been 12.1% compared with the corresponding period last year.

Greater revenue growth relative to the Group's increased cost base resulted in a 19.1% reduction in the Group's net expenses to £0.7million (H1 2017: £0.9million). The underlying reduction in net expenses was 50.9% compared with the corresponding period last year and the Group's drive to minimise NAV erosion arising as a result of its operating model will continue.

During the six months ended 30 September 2018 the Group invested £9.2million net (H1 2017: £9.7million) in 10 existing and one new direct investment (H1 2017: eight and one respectively). Since the period end the Group has invested a further £2.8million (H1 2017: £3.3million) in one (H1 2017: four) existing and one new direct investment, W2 (H1 2017: one). The investment momentum seen in the first half of the financial year is expected to accelerate in the second half.

Net fair value increases during the period totalled £2.6million (H1 2017: £3.0million) and as at 30 September 2018 the fair value of the Group's direct investment portfolio was £77.8million (H1 2017: £64.7million). Net assets at the period end were £125.2million (H1 2017: £123.6million) resulting in an increase in net assets per share (being net assets of £125.2million divided by 303,309,707 shares in issue) to 41.3 pence (H1 2017: 41.1 pence (being net assets of £123.6million divided by 300,602,232 shares in issue)).

Within total net assets, cash and short-term deposits totalled £39.1million (H1 2017: £55.2million), including £0.8million of cash held on behalf of third-party EIS investors (H1 2017: £6.6million).

The net fair value increases combined with the reduction in net expenses contributed favourably to result in a 35.7% increase in the consolidated total comprehensive profit for the period to £1.9million (H1 2017: £1.4million). This in turn has resulted in a 33.3% increase in earnings per Ordinary share to 0.64p (H1 2017: 0.48p).

Alternative performance measures

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

Summarised condensed consolidated statement of comprehensive income

Revenue

Total revenue of £5,270,000 (H1 2017: £4,849,000) comprised fund management fees, initial management fees from direct investments and investment director monitoring fees.

Other administrative expenses

Total other administrative expenses of £5,956,000 (H1 2017: £5,697,000) consisted predominantly of all staff related and office, marketing and professional adviser costs.

Net expenses

Net expenses of £686,000 (H1 2017: £848,000) represent total revenue less all staff and administrative expenses.

Fair value movements in investments

For the six months ended 30 September 2018, unrealised fair value gains arose in four (H1 2017: five) out of the Group's 26 (H1 2017: 25) direct investments. The largest fair value gain was Faradion, which accounted for £1,625,000 of the total. There were two (H1 2017: five) fair value decreases, the largest being Concepta Plc for £468,000, which arose from a fall in its share price during the period, despite continuing commercial progress and a successful Placing.

Share-based payments charge

The £32,000 non-cash credit (H1 2017: £234,000 charge) arises from the forfeiture of share options net of the issue of new share options to Executive Directors and other employees of the Group, ranging from the date of Mercia's IPO to 30 September 2018.

Amortisation of intangible assets

The amortisation charge of £150,000 (H1 2017: £150,000) represents amortisation of the acquired intangible assets of Enterprise Ventures Group Limited ("Enterprise Ventures") for the six-month period under review.

Finance income

Finance income of £106,000 (H1 2017: £165,000) was predominantly interest receivable earned on the Group's cash and short-term liquidity investments.

Balance sheet and cash flows

Net assets at the period end of £125,172,000 (H1 2017: £123,581,000) 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 due to the nature of its business.

Direct investment portfolio

During the six months under review, Mercia's direct investment portfolio grew from £66,070,000 (H1 2017: £52,028,000) to £77,827,000 (H1 2017: £64,740,000). The table below lists the Group's investments by value as at 30 September 2018, including a breakdown of the net cash invested during the period, fair value movements and the equity percentage of each company owned. At the period end, the Group's leading 20 direct investments represented 98.7% of the total portfolio value (H1 2017: 98.8%).

Cash and short-term liquidity investments

At the period end, Mercia had total cash and short-term liquidity investments of £39,049,000 (H1 2017: £55,167,000) comprising cash of £28,900,000 (H1 2017: £30,167,000) and short-term liquidity investments (being cash on deposit with maturities between three and six months) of £10,149,000 (H1 2017: £25,000,000). Cash included £768,000 (H1 2017: £6,640,000) held on behalf of third-party EIS investors. The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment and trading purposes, not yield. At the period end the Group's cash and short-term liquidity investments were spread across five leading United Kingdom banks.

The summarised movement in the Group's cash position during the six months ended 30 September 2018 is shown below.

Overall, progress continues to be in line with the Group's strategic objectives through a combination of the increasing fair value of the direct investment portfolio, whilst minimising net expenses.

Martin Glanfield

Chief Financial Officer

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2018

All results derive from continuing operations.

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

Condensed consolidated balance sheet

As at 30 September 2018

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

The condensed consolidated interim financial statements of Mercia Technologies PLC were approved by the Board of Directors and authorised for issue on 3 December 2018. They were signed on its behalf by:

Dr Mark Payton Martin Glanfield

Chief Executive Officer Chief Financial Officer

Condensed consolidated cash flow statement

For the six months ended 30 September 2018

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2018

Notes to the interim financial statements

For the six months ended 30 September 2018

1. Accounting policies

The principal accounting policies applied in the presentation of the condensed consolidated interim financial statements of Mercia Technologies PLC ('the Group', 'Mercia') are consistent with those followed in the preparation of the Group's Annual Report and consolidated financial statements for the year ended 31 March 2018 and have been consistently applied throughout the period ended 30 September 2018, except for those policies that relate to new standards and interpretations effective for the first time for accounting periods beginning on or after 1 January 2018, and which therefore apply to these condensed consolidated interim financial statements. Details of the new standards impacting the Group and which have given rise to changes in the Group's accounting policies applied in the presentation of these condensed consolidated interim financial statements are set out below. No new standards which have become effective in the period have had any effect on these condensed consolidated interim financial statements.

General information

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

Basis of preparation

The financial information presented in these condensed consolidated interim financial statements constitutes the condensed consolidated financial statements of Mercia Technologies PLC and its subsidiaries for the six months ended 30 September 2018. These condensed consolidated interim financial statements should be read in conjunction with the Group's Annual Report and consolidated financial statements for the year ended 31 March 2018, which have been prepared in accordance with European Union ("EU") endorsed International Financial Reporting Standards ("IFRSs"), the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee ("IFRIC")) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS.

These condensed consolidated interim financial statements and the comparative financial information presented in these condensed consolidated interim financial statements for the period ended 30 September 2018 do not constitute full statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Group's Annual Report and consolidated financial statements for the year ended 31 March 2018 were approved by the Board on 29 June 2018 and have been delivered to the Registrar of Companies. The Group's independent auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

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

The financial information in these condensed consolidated interim financial statements, which were approved by the Board and authorised for issue on 3 December 2018, has been reviewed by the Group's independent auditor.

New standards and changes in accounting policies

New standards impacting the Group that will be adopted in its Annual Report and consolidated financial statements for the year ending 31 March 2019, and which have been applied in the presentation of these condensed consolidated interim financial statements, are IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'.

IFRS 9 'Financial Instruments'

This standard replaces IAS 39 'Financial Instruments: Recognition and Measurement' and introduces new guidance under three main components being classification and measurement, impairment and hedge accounting. IFRS 9 is based on the concept that financial assets should be classified and measured at fair value, with changes in fair value being recognised through profit or loss ("FVTPL") or fair value through other comprehensive income ("FVOCI") only, without the recycling of fair value changes to profit or loss. Given that the majority of the Group's financial assets, and specifically its direct investments, are already held at fair value through profit or loss, the adoption of IFRS 9 has not had any impact on the Group's results.

IFRS 9 also establishes a new approach for loans and receivables, including trade receivables, in that its 'expected credit loss' model focuses on the risk that a loan or trade receivable will default rather than whether a loss has been incurred. Under this model, an entity calculates the allowance for credit losses by considering on a discounted basis the cash shortfalls it would incur in various default scenarios for prescribed future periods and the probability of each scenario occurring. The Group has one type of financial asset that is subject to the new expected credit model, being trade and other receivables. Given that the Group already applies this approach in assessing the level of impairment necessary to its trade receivables, the adoption of IFRS 9 has not had any impact on the Group's results.

The third component of the new standard, hedge accounting, is not applicable to the Group because it has no derivatives, nor does it apply hedge accounting to any of its transactions.

In summary, the Group has concluded that the application of IFRS 9 results in no differences in the classification and measurement nor impairment of its financial instruments and as a result, there is no requirement to restate the comparative information provided in these condensed consolidated interim financial statements, nor change its accounting policy.

IFRS 15 'Revenue from Contracts with Customers'

This standard replaces revenue recognition guidelines including IAS 18 'Revenue', IAS 11 'Construction Contracts' and revenue related IFRICs and introduces a new revenue recognition model that recognises revenue either at a point in time or over time. The model provides a contract-based, five-step analysis of transactions to determine whether, how much and when revenue is recognised, based on the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers.

The standard implements a uniform method of recognising revenue based on the actual contract and performance obligation. Revenue will be recognised when an entity satisfies a performance obligation by transferring a promised good or service to its customer. As such, the amount of revenue recognised is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically the promise to transfer goods to a customer) or over time (typically the promise to provide services to a customer).

The Group's revenue represents amounts receivable for services provided in the normal course of business, net of VAT. All revenue from services is generated within the United Kingdom, from its investment and fund management activities. Revenue from services comprises:

Fund management fees

Fund management fees are generally earned as a fixed percentage of funds under management and were previously recognised as the related services were provided. Under IFRS 15, the performance obligation of providing those services is satisfied over a period of time, being the contractual period for which the services are provided. Accordingly, the Group continues to recognise annual fund management fee revenue over the contractual period for which the services are provided.

Initial management fees

Initial management fees are generally earned as a fixed percentage of the amounts invested by the Group in recognition of the work involved in each investment round, are one-off payments made by the investee company and were previously recognised upon completion of the investment. Under IFRS 15, the performance obligation of providing those services is satisfied at a point in time, being upon completion of the investment. Accordingly, the Group continues to recognise initial management fee revenue upon completion of the investment.

Portfolio directors' fees

Portfolio directors' fees are earned either as a percentage of the amounts invested by the Group, or as a fixed amount. These are usually annual fees, typically charged quarterly in advance to the investee company. They are distinct and separable to annual fund management fees and initial management fees. Previously, amounts were initially recorded as deferred income, included under current liabilities and amortised in the consolidated statement of comprehensive income over the period to which the service relates. Under IFRS 15, the performance obligation of providing the portfolio directors' services is satisfied over a period of time, as specified in the investment agreement. Accordingly, the Group continues to record amounts invoiced as deferred income, included under current liabilities and then amortises them in the consolidated statement of comprehensive income over the contractual period for which the services are provided.

In summary, the Group has assessed that the application of IFRS 15 results in no differences in the timing of revenue recognition and as a result, there is no requirement to restate the comparative information provided in these condensed consolidated interim financial statements. The Group has, however, changed its revenue recognition policy to adopt the standard's five-step framework, such that revenue in respect of services provided is recognised when a contractual performance obligation can be identified, a transaction price can be determined and allocated to that performance obligation and that performance obligation has been or is being satisfied.

Standards issued not yet effective

IFRS 16, 'Leases' is effective for accounting periods beginning on or after 1 January 2019 (with earlier adoption permitted if IFRS 15 'Revenue from Contracts with Customers', is also adopted). The standard will first be adopted by the Group in its financial statements for the year ending 31 March 2020.

Under IFRS 16, which replaces IAS 17 'Leases', lessees will be required to apply a single model to recognise both a lease liability and asset for all leases, including those classified as operating leases under current accounting standards, unless the underlying asset has a low value or the lease term is 12 months or less. The Group considers that the new standard will impact three of its current land and buildings operating leases, as those with a term of more than 12 months will give rise to a right of use asset (the right to use the leased offices), which will be amortised on a straight-line basis and a lease liability (the obligation to make lease payments) which will be amortised using the effective interest method. Depreciation and interest will replace the operating lease payments currently recognised as a rent expense.

The Group intends to apply IFRS 16 initially on 1 April 2019, using the modified retrospective approach. The cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 April 2019, with no restatement of comparative information required.

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In preparing these condensed consolidated interim financial statements, the significant judgements made by the Directors in applying the Group's accounting policies and the key sources of estimation uncertainty are the same as those applied to the consolidated financial statements for the year ended 31 March 2018.

Principal risks and uncertainties

The risks and uncertainties that the Board considered to be key to achieving the Group's strategic objectives were detailed in the Annual Report and consolidated financial statements for the year ended 31 March 2018. A further assessment was made at the half year end and the significant risks identified were unchanged from those presented in the Annual Report.

Going concern

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

2. Segmental reporting

For the six months ended 30 September 2018, the Group's revenue and profit were derived from its principal activity within the United Kingdom.

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

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

3. Fair value movements in investments

No other gains or losses have been recognised in respect of receivables, nor have any gains or losses been recognised on financial liabilities measured at amortised cost.

4. Earnings per share

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

The calculation of diluted earnings per share includes 3,685,555 (H1 2017: nil) share options that are dilutive for the period because the exercise price together with the future IFRS 2 charge of the options is less than the average fair value of the Ordinary shares during the period.

5. Goodwill

Included in goodwill is £7,873,000 which arose on the acquisition of the entire issued share capital of Enterprise Ventures on 9 March 2016. This represents the difference between the fair value of consideration transferred and the fair value of assets acquired and liabilities assumed.

6. Intangible assets

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

7. Investments

The net change in the value of investments for the period is £11,757,000 (H1 2017: £12,712,000).

The Group's valuation policies are set out in detail in its consolidated financial statements for the year ended 31 March 2018. The table below sets out the movement in the balance sheet value of investments from the start to the end of the period, showing investments made, investee company loans repaid and the direct investment fair value movements.

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

Cash at bank and in hand of £28,900,000 (H1: £30,167,000) includes £768,000 (H1 2017: £6,640,000) of cash held on behalf of third-party EIS investors.

9. Trade and other payables

Trade and other payables includes the liability in respect of the £768,000 (H1 2017: £6,640,000) of cash held on behalf of third-party EIS investors.

10. Fair value measurements

The fair values of the Group's financial assets and liabilities are considered a reasonable approximation to the carrying values shown in the balance sheet. Subsequent to their initial recognition at fair value, measurements of movements in the fair values of financial instruments are grouped into Levels 1 to 3, based on the degree to which the fair value is observable. The fair value hierarchy used is outlined in more detail in note 2 of the Group's consolidated financial statements for the year ended 31 March 2018.

The following table summarises the fair value hierarchy of the Group's financial assets that are measured at fair value through profit or loss as at 30 September 2018.

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

Financial instruments in Level 1

As at 30 September 2018, the Group had one (H1 2017: one) direct investment listed on AIM (Concepta Plc) and this has been classified as Level 1 and valued at its bid price at the period end.

Financial instruments in Level 3

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

A detailed explanation of the valuation techniques used for Level 3 financial instruments is given in note 2 of the Group's consolidated financial statements for the year ended 31 March 2018.

The table below summarises the fair value measurements.

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

11. Related party transactions

There has been no material change in the type of related party transactions described in the consolidated financial statements for the year ended 31 March 2018.

Independent review report to Mercia Technologies PLC

We have been engaged by Mercia Technologies PLC to review the condensed consolidated set of financial statements in the half-yearly financial report for the six months ended 30 September 2018 which comprise the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of changes in equity and related notes 1 to 11. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of financial statements.

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

Directors' responsibilities

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

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

Our responsibility

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

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the half-yearly financial report for the six months ended 30 September 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

Deloitte LLP

Statutory Auditor

Birmingham, United Kingdom

3 December 2018

Directors, secretary and advisers

Directors