Mercia Asset Regulatory News (MERC)

Mercia Asset Management PLC

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

Interim results for the six months ended 30 September 2022

Continuing profitable progress and a strong balance sheet, underpins a 10% increase in the interim dividend

Mercia Asset Management PLC (AIM: MERC), the proactive regionally focused, profitable specialist asset manager with c.£979million of assets under management ("AuM"), is pleased to announce its interim results for the six months ended 30 September 2022.

Highlights

· Adjusted operating profit up c.50% to £3.6million (H1 2022: £2.4million)

· £5.6million fair value increase in direct investments (H1 2022: £8.7million)

· Profit before taxation of £7.4million (H1 2022: £11.0million)

· Interim dividend up c.10% to 0.33 pence per share (H1 2022: 0.30 pence per share)

· Robust balance sheet with cash and short-term liquidity investments of £56.1million as at 30 September 2022 (H1 2022: £52.1million; FY 2022: £61.3million)

· Group AuM of £979.4million (H1 2022: £948.4million; FY 2022: £959.2million), with a c.10% increase in the fair value of the direct investment portfolio from 31 March 2022

· Net assets per share up c.3% to 46.8 pence (H1 2022: 42.4 pence; FY 2022: 45.6 pence)

Financial results

1 The interim dividend will be payable to shareholders on the register on 16 December 2022 and will be paid on 4 January 2023.

2 Adjusted operating profit is defined as operating profit before exceptional net performance fees, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. It includes net finance income. A reconciliation of operating profit to adjusted operating profit is included in the Chief Financial Officer's review.

Managed fund developments

· Third-party funds under management ("FuM") of c.£773million (H1 2022: c.£762million; FY 2022: c.£758million)

o  Venture FuM c.£611million (H1 2022: c.£601million; FY 2022: c.£592million)

§ £40.0million successfully raised by the three Northern Venture Capital Trusts ("VCTs")

§ First Knowledge-intensive Impact Enterprise Investment Scheme ("EIS") and Q3 2022 EIS Funds raised a combined c.£13million during the period

§ Interim and final dividends totalling £10.1million paid by the three Northern VCTs

o  Private equity FuM c.£46million (H1 2022: c.£53million; FY 2022: c.£48million)

o  Debt FuM c.£116million (H1 2022: c.£108million; FY 2022 c.£118million)

§ Accreditation awarded to the Group to deliver debt funding under the third phase of the Recovery Loan Scheme ("RLS")

Direct investment portfolio developments

· Direct investment portfolio fair value of £131.5million (H1 2022: £110.3million; FY 2022: £119.6million), up c.10% from 31 March 2022 despite the UK macroeconomic backdrop and global geopolitical instability

· £6.4million net invested into six portfolio companies (H1 2022: £5.4million net invested into five portfolio companies), including a new direct investment into Uniphy Limited ("Uniphy")

· £5.6million fair value increase in the portfolio during the six-month period (H1 2022: £8.7million)

· Demerger of Intechnica Limited's ("Intechnica") cybersecurity bot-management business Netacea Limited ("Netacea") completed during the period, allowing both companies to benefit from a refined focus on their respective target markets

Post period end developments

· Investments totalling £5.3million completed into two new direct portfolio companies, Axis Spine Technologies Limited ("Axis Spine") and Nova Pangaea Technologies Limited ("Nova Pangaea")

o  Axis Spine is a Med Tech business delivering spinal implants designed to address the increasingly recognised and unmet clinical need of cage subsidence

o  Nova Pangaea is a Clean Tech business focused on creating biofuels and biochar to address some of the most pressing climate concerns of today

· A £3.0million investment has been made into Netacea to fund its commercial expansion

· £11.5million additional allocation from British Business Bank ("BBB") under the Midlands Engine Investment Proof-of-Concept Fund ("MEIF")

· Commercial progress continues to be made overall by the direct investment portfolio

· Acquisition of Frontier Development Capital Limited ("FDC") for an initial cash consideration of £5.5million, adding c.£415million of profitable FuM to the Group

Mark Payton, Chief Executive Officer of Mercia, commented:

"In these challenging times, both nationally and globally, the resilience of Mercia's hybrid investment model is evident as we continue to drive growth in assets under management, net asset value per share and our progressive dividend. Our debt-free balance sheet and significant liquidity means Mercia is well placed to capitalise at a time in the cycle when there are compelling opportunities to be had. These results also showcase our track record of delivery, with Mercia having returned c.£280million back to our fund investors since April 2020. With our strong cash position, exceptional team and proven ability to generate attractive returns across asset classes, we continue to look forward with confidence as we progress towards our Mercia '20:20' targets."

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018. Upon publication of this announcement, this inside information is now considered to be in the public domain.

-Ends-

For further information, please contact:

Analyst briefing

An analyst webcast will be given by Dr Mark Payton, Chief Executive Officer, Martin Glanfield, Chief Financial Officer, and Julian Viggars, Chief Investment Officer, at 9.30am today, 6 December 2022. Analysts wishing to register are asked to contact mercia@fticonsulting.com. An audio webcast of this briefing will subsequently be available later in the day via Mercia's website.

Investor presentation

In addition, as part of its continuing commitment to appropriate and open communication with all shareholders and its wider stakeholder community, Mercia will provide a live management presentation and Q&A via the Investor Meet Company ("IMC") platform at 3.00pm today. Registration details can be accessed via:

https://www.investormeetcompany.com/mercia-asset-management-plc/register-investor

About Mercia Asset Management PLC

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

The Group has a strong UK footprint through its regional offices, university partnerships and extensive personal networks, providing it with access to high-quality deal flow.

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

Chief Executive Officer's Review

Introduction

In these challenging times, it is pleasing to report continued, steady momentum at Mercia. We are in the strong position of being able to build from a solid base, providing support for founders and managers of many of the UK's leading SMEs, to enable them to focus on long-term growth. Key metrics that demonstrate the resilience of Mercia's hybrid investment model during these times include:

· Like-for-like revenue increase of 8% to £12.2million

· Adjusted operating profit increase of c.50% to £3.6million

· Interim dividend up c.10% to 0.33 pence per share

· Nets assets per share increased by c.3% to 46.8 pence

· AuM of c.£979million, with a c.10% increase in the fair value of the direct investment portfolio from 31 March 2022.

Our vision remains to become the first choice for investees, investors and employees. At this midpoint in our current three-year Mercia '20:20' strategic plan, we remain confident that we will achieve our goals of £60.0million in cumulative pre-tax profits and c.£600million cumulative growth in AuM by 31 March 2024. With the acquisition of FDC alongside organic growth in FuM, AuM is now c.£1.4billion. The positive progress being made against these twin goals continues to underpin our progressive dividend policy.

Distribution, in terms of both organic FuM growth and deal origination, is critical to Mercia's continued success and scale and is underpinned by our nine offices across the regions. Furthermore, all the capital that we manage is in closed-end or evergreen structures, providing a stable source of long-term third-party capital which is not subject to redemptions. This allows the team to progressively spot and build value without the vulnerability of capital withdrawal from our managed funds. The pools of capital we manage are split into (i) 'retail' ie individual investors (via Mercia's EIS and Northern VCTs), (ii) government agencies (both national and regional) and (iii) institutional capital (typically regional pension funds).

Strength in numbers: A reputation for delivery

Mercia's hybrid model of combining interlinked, risk-adjusted third-party FuM with scale-up capital via Mercia's balance sheet, ensures the supply of the right capital to the right business at the right time. This hybrid investment model originated in 2010 ahead of Mercia's IPO in 2014, and now delivers a critical mass and maturity that is helping deliver returns to our fund investors and shareholders as well as, crucially, to the founders and managers of our investees whom we have the great privilege of supporting. In addition, Mercia's management of our EIS funds and Northern VCTs consistently scores highly with external reviewers who have recognised the strengths of our 'Complete Connected Capital' model, investees, exit track record and the excellence of the team we have built at Mercia.

Our performance, which has seen us return c.£280million to investors across our collective asset classes since April 2020, will underpin our continuing efforts to further grow AuM organically over the near-to-medium term.

The exits we have achieved from Mercia's direct investment portfolio have yielded an average premium to holding value of c.53%. The table below shows our performance since IPO, in terms of fully-realised exits. To date, every full-cash exit has been above carrying value.

The table above demonstrates the value Mercia has created through its balance sheet exits over time. This performance not only validates Mercia's disciplined approach to valuation, but also points to the potential of future net asset value increases from realisations over time.

With over a quarter of Mercia's AuM in unrestricted cash available for investment, our reputation as a truly regional investor aligned with our investees' growth aspirations, is aiding our deal sourcing and continues to be a key competitive advantage. During this six-month period, we received 1,165 requests for investment and invested c.£56million into 80 businesses. This investment cadence is critical to meeting our capital deployment targets across both our debt and equity teams as we look to build out our portfolios with new investments, during a period where value for a patient investor with capital to deploy will become evident.

With the recent opening of our Bristol office and the acquisition of FDC providing a central Birmingham location, we now have nine fully-staffed offices across the UK plus two further satellite offices in Nottingham and Hull. These offices provide us with reach across the entirety of England, Scotland and Wales for deal origination and portfolio support. Following the FDC acquisition, Mercia now has 144 employees and we continue to invest in our talented team as we work together to deliver Mercia's '20:20' strategy. I am proud of the diverse and inclusive culture at Mercia as we continue to operate within our core values of trust, growth, knowledge and responsiveness, coupled closely with our dedication to the UN Principles of Responsible Investment.

Outlook

Many businesses are facing national and global headwinds as we approach 2023. This is arguably most acute in the technology sector and, specifically, within capital-intensive, loss-making business-to-consumer companies. These headwinds are particularly visible in the public markets. Against this backdrop Mercia is well placed, especially given the significant liquidity we have to deploy into what is a buyers' market.

With our focus on SMEs within the UK, predominantly businesses in sectors with relatively modest capital needs, we and the funds we manage, are able to continue to support these businesses with additional capital as and when needed during these turbulent times. As almost all businesses in our portfolios are private businesses, our exposure to the public markets is limited. In addition, as a debt-free, cash-rich business, Mercia is well placed to capitalise on both corporate (as evidenced by our recent acquisition) and direct investment opportunities as we invest through the cycle. A majority of the Group's investment realisations are through trade sale exits (just two exits in the last two years were via IPOs), and this part of the market remains relatively resilient.

I am sincerely grateful to all our employees, portfolio companies, managed fund investors, our many other valued stakeholders and, of course, our shareholders, for their continued commitment and belief in Mercia.

At this mid-point in our current three-year strategic plan, we remain confident that we will deliver Mercia '20:20' by 31 March 2024.

Though the public markets may be stressed, Mercia is not.

Dr Mark Payton Chief Executive Officer

Chief Investment Officer's review

Investment activity

During the six months to 30 September 2022, we invested c.£56million into 80 businesses across our funds and balance sheet. This included 34 companies new to Mercia's third-party managed funds and one new direct investment portfolio company, Uniphy. At the end of the period, we had c.£296million of liquidity to support our future investment activity, including c.£56million on our balance sheet, putting us in a strong position as we move towards 2023. Overall, AuM increased c.2% to c.£979million, including positive direct investment net fair value movements of £5.6million.

We have started to reap the benefits of our expanding regional footprint with four new investments in the South West region, and see significant opportunity in this vibrant part of the UK. It is due to the scale of the opportunity here that we will soon be expanding our South West team to four full-time investment professionals, based in Bristol.

Investment realisations

During the six-month period to 30 September 2022, we benefitted from 14 full and partial equity exits (H1 2022: nine). These realised c.£25million at a combined return of 1.6x. The standout exit was C7 Health Limited ("C7"), which we sold in June to TAC Healthcare Limited ("TAC Healthcare"), generating a c.14x cost return for our earliest EIS investors and a c.9x cost return for subsequent fund investors. The overall blended cash-on-cash return was lower, as nine businesses were exited at either less than investment cost or were partial realisations. Within the management of venture portfolios, it is crucial to alleviate investment management time from underperforming assets. This discipline will continue as our portfolios mature and grow in size.

Proprietary capital

As at 30 September 2022, our direct investment portfolio was fair valued at £131.5million (H1 2022: £110.3million; FY 2022: £119.6million) with 22 active companies (H1 2022: 20; FY 2022: 21).

We invested £6.4million net into the direct investment portfolio in the first six months of the current financial year (H1 2022: £5.4million). A significant amount of time was spent evaluating our new deal pipeline, which resulted in a small initial investment into Uniphy, a Deep Tech business that can enable any surface to become a smart human-machine interface. Our efforts also saw us add two new direct investments shortly after the period end in October 2022, with Axis Spine, a Med Tech business delivering spinal implants, and Nova Pangaea, a Clean Tech business focused on creating biofuels and biochar to address some of the most pressing climate concerns of today. The investment into Axis Spine was part of a £10.0million series A round which included other Mercia funds, as well as continuing our strategy of bringing in specialist new syndicate partners, such as MedTex Ventures LLC from the USA, a specialist healthcare investor.

The table below lists Mercia's top 20 investments by fair value as at 30 September 2022, including the net cash invested, realisation proceeds, fair value movements and the fully diluted equity percentage held.

* Trading as Avid Games

** Trading as Intelligent Positioning

*** Formerly Intechnica Group Ltd prior to the demerger of Netacea Ltd

Direct investment portfolio highlights

The period under review saw net upward fair value movements of £5.6million, mainly driven by significant commercial progress at our two mobile games businesses, VirtTrade Limited ("VirtTrade") and Invincibles Studio Limited ("Invincibles Studio"), in addition to continued progress made by Warwick Acoustics Limited ("Warwick Acoustics"). The significant fair value movement shown above on Intechnica follows the demerger into separate entities of the profitable Intechnica consultancy business and Netacea, the bot management business; however if taken together, the aggregate carrying value of the two businesses has not changed from that of the original Intechnica Group Limited as at 31 March 2022. The other small fair value uplift arose as a result of MyHealthChecked PLC's share price increase from 1.6 pence as at 31 March 2022, to 1.7 pence as at 30 September 2022. These uplifts were balanced against falls at our lower growth software businesses, Intelligent Positioning Limited, W2 Global Data Solutions Limited, and digital games company Edge Case Games Limited as expected royalty receipts from Wargaming move further out into the future.

Our top 10 direct investment holdings represent c.82% of the value of our portfolio as at 30 September 2022. There has been positive progress across a number of our largest investments as summarised in the sectorial review below.

Digital Entertainment; c.33% by value of the portfolio

nDreams Limited ("nDreams"): 33.2% fully diluted direct investment

Farnborough-based nDreams achieved revenues of £5.6million for the year to 31 March 2022. Following the £20.0million investment from Aonic AB in March 2022, the company has significantly grown its workforce and capabilities. It now has four teams working across three studios on different projects, including a new remote team working on truly next-generation virtual reality ("VR") gaming concepts including Ghostbusters VR with Sony Pictures and Meta. Its third-party publishing division continues to progress after the successful launch of Little Cities in early 2022.

Mercia first supported nDreams in 2014 via its managed funds. The company is highly regarded in the VR space as much for its technical capability in VR, following the launch of its Fracked game, as for its quality content and publishing success.

Invincibles Studio: 39.0% fully diluted direct investment stake with a further 7.6% fully diluted stake held by Mercia's managed funds

North West-based mobile soccer management game developer Invincibles Studio continues to make steady progress. Its Soccer Manager 2023 game launch in late September 2022 has resulted in significant growth, with new users up c.80% and revenues up more than c.50%. Invincibles Studio has renewed its previously negotiated licences with FIFPro, the Scottish Premier League, Arsenal football club manager Mikel Arteta as the face of the game, and the social media rights to Inter Milan. It has also signed a worldwide licence with the Bundesliga and its players. Invincibles Studio has two new games in development which will be launched in 2023. The first will be Ultimate Soccer League, a new multiplayer game that will offer a differentiated experience from other football management games, in Spring 2023.

VirtTrade: 40.6% fully diluted direct investment stake with a further 4.2% fully diluted stake held by Mercia's managed funds

VirtTrade originally developed and operated a platform that enabled the rapid creation, distribution and sale of digital trading cards across white-label mobile applications. The business launched a mobile game using its own intellectual property called 'CUE Cards' (Cards, the Universe and Everything) in December 2019 and is now focused entirely on growing this game. VirtTrade has been able to scale significantly over the past year, and has grown monthly revenues five-fold, by focusing on the key metric of return on advertising spend.

Software; c.27% by value of the portfolio

Voxpopme Limited ("Voxpopme"): 17.6% fully diluted direct investment stake with a further 13.6% fully diluted stake held by Mercia's managed funds

Voxpopme is a software business based in Birmingham and Colorado USA that provides video analytics software to firms in the market research, customer experience and, in the future, the recruitment and HR markets. Its primary business of video data analytics is proving disruptive to both the market research and customer experience markets, where it has launched products to date. Its annual recurring revenue ("ARR") has now grown to $8.4million.

Netacea: 24.1% fully diluted direct investment stake with a further 26.5% fully diluted stake held by Mercia's managed funds

Manchester-based Netacea has developed an enterprise server-side bot management solution that protects websites, mobile apps and APIs from automated threats, using an intelligent detection engine. The agentless technology focuses on understanding the traffic's intent rather than just distinguishing between human and malicious bots. It is now a standalone entity with an ARR of c.£6million, having demerged from Intechnica, and is concentrating on scaling its sales and partnership business, both in the UK and in the USA.

Deep Technology ("Deep Tech"); c.20% by value of the portfolio

Impression Technologies Limited ("ITL"): 65.1% fully diluted direct investment stake with a further 0.9% fully diluted stake held by Mercia's managed funds

ITL has been developing a proprietary aluminium lightweight technology, HFQ™, with its own pressing plant in Coventry, since 2016. Alongside its German licensee, Fischer, it recently showcased the world's first example of an HFQ-formed high-strength aluminium structure using 100% recycled aluminium (having the potential to reduce embedded carbon by over 90%). In addition, ITL presented an innovative single-piece battery enclosure lid made from high-strength alloy. As an innovation that could offer reduced weight, part count and carbon intensity, HFQ captured the attention of a large number of engineers from established and emerging original equipment manufacturers ("OEMs"), with a focus on new electric vehicle and delivery van platforms.

Warwick Acoustics: 40.3% fully diluted direct investment stake with a further 1.3% fully diluted stake held by Mercia's managed funds

Midlands-based Warwick Acoustics creates highly innovative audio products for both the automotive and the high-end personal and studio headphone market. The company raised a further £2.5million in the summer from new and existing shareholders to fund its next stage of development. Commercial traction continues with three ongoing projects at various stages with global automotive OEMs and with others under current negotiation.

Life Sciences; c.20% by value of the portfolio

Medherant Limited ("Medherant"): 33.1% fully diluted direct investment stake with a further 13.1% fully diluted stake held by Mercia's managed funds

Midlands-based Medherant is a University of Warwick spinout commercialising a platform of proprietary patch adhesive for medical applications. It benefits from several external partnerships and its internal development program is progressing well ahead of a potential late-2023 launch. In respect of its external partnerships, one has progressed through the first two evaluation hurdles, with the collaboration having been extended further. If successful, this would address a multi-billion-dollar market opportunity.

Locate Bio Limited ("Locate Bio"): 18.1% fully diluted direct investment stake with a further 24.6% fully diluted stake held by Mercia's managed funds

Nottingham-based Locate Bio is developing a range of orthobiologics, including its lead bone graft solution which continues its large trials program as part of the US Food and Drug Administration approval process. Locate Bio's products will be used by orthopaedic surgeons to accelerate the natural repair of bone and cartilage. Addressing a multi-billion-pound global market, Locate Bio currently has four products going through trials.

Assets under management

AuM increased by c.2% to c.£979million, with c.£54million of new capital raised by our retail EIS and Northern VCTs during the six-month period. Partially offsetting these AuM inflows were downward valuation movements in AIM- quoted VCT portfolio companies, the largest being musicMagpie plc, in addition to distributions back to fund investors and dividends paid to VCT and Mercia shareholders.

Third-party managed funds

As at 30 September 2022, we were managing c.£773million of third-party funds (H1 2022: c.£762million; FY 2022: c.£758million). Across those funds we had c.£240million of liquidity (H1 2022: c.£232million; FY 2022: c.£236million), which enables us to fully support our portfolio companies and transact new deals in the future.

In April 2022, we added a further c.£45million of organic FuM following successful EIS and Northern VCT fundraises, and in September 2022, closed our Q3 2022 EIS Fund, raising c.£9million. Furthermore, post period end, we have received a further c.£12million allocation from the BBB in relation to our MEIF mandate.

During the six-month period ended 30 September 2022, we invested £49.1million across the multiple funds which we manage as follows:

Managed funds' portfolios

Venture

The 13 full and partial exits returned £25.0million in the six months to 30 September 2022, at a combined return of 1.6x. The standout exit was C7, which we sold in June to TAC Healthcare, generating proceeds of £8.0million, equating to a return of c.14x cost for our earliest EIS investors and c.9x cost for subsequent fund investors. Our VCTs exited two investments; AIM-quoted Ideagen PLC, which has been held since its listing, generating a return of 5.9x cost, and Edtech business, Knowledgemotion Limited, which returned 1.7x cost.

Our third-party managed funds across all asset classes have exposure to various technology sectors, but do not typically invest in capital-intensive businesses or pre-IPO scale-ups hoping to list before reaching profitability and cash generation.

Private equity ("PE")

The value of our PE funds declined marginally during the six months to 30 September 2022. Although Shoppertainment Limited and ParkVia Limited, previously exposed to COVID-19-related issues, returned to growth, supply chain headwinds and inflationary pressures continued to impact the portfolio.

Debt

Mercia's Debt funds' team saw an increase in activity during the period, supporting 33 businesses, lending a total of £9.7million. In August 2022, Mercia gained accreditation to deliver loans under phase three of the Government's RLS, via its Northern Powerhouse Investment Fund debt mandate. Mercia's vastly experienced Debt team continues to support profitable SMEs, mainly across the North of England.

Summary

Only six months ago, I finished my Chief Investment Officer's review for the year to 31 March 2022, saying that we must not ignore the effects of inflation, ongoing supply chain issues and the uncertainty caused by military conflict. We are now seeing the effects of all of these, alongside additional political and mortgage rate instability, within our daily lives. This has meant that we find ourselves in quite remarkable times. In contrast, the past six months at Mercia have been relatively unremarkable; our experienced team has been well prepared and our investee companies have put their heads down and got on with what is in front of them. We continually review cash levels at our investees and believe that their management teams work best when they are not looking over their shoulders. We have ample cash on our balance sheet and liquidity within our third-party funds to continue to support the most promising investments over the next 12 months and beyond.

The beauty of our model at Mercia is that we can also provide significant non-financial support to our companies, with value enhancing input from our Head of Portfolio Resourcing, Lisa Ward, and her team. Within our network of over 1,000 experienced NEDs, chairs and operating partners, there are complementary skill sets that we can introduce to help our portfolio businesses grow or navigate speed bumps; in the first six months we have made 16 such additional appointments.

The first half of the financial year has yielded continued progress across our portfolio companies despite toughening conditions. As always, I would like to thank all our dedicated staff for their efforts during the past six months.

Julian Viggars

Chief Investment Officer

Chief Financial Officer's review

Overall financial performance

Mercia has maintained positive financial momentum during the first half of the current financial year, with increases in adjusted operating profit, net assets and net assets per share.

Interim dividend

The Board adopted Mercia's progressive dividend policy in December 2020, and since then has announced interim dividends of 0.10 pence per share in December 2020 and 0.30 pence per share in December 2021. Shareholders also approved a maiden final dividend of 0.30 pence per share in September 2021 and 0.50 pence per share in September 2022.

Given the Group's twin sources of profitability and cash inflow, being regionally focused proactive specialist asset management, plus direct investment and periodic cash realisations, the Group's dividend policy does not need to be anchored to one or other source of liquidity, hence the Board's intention to grow total dividends year on year.

The continuing positive overall Group performance, coupled with its future prospects, has enabled Mercia's Board to declare an interim dividend of 0.33 pence per share (H1 2022: 0.30 pence per share). The interim dividend will be paid on 4 January 2023 to shareholders on the register at close of business on 16 December 2022, with the total dividend payable being £1,452,000 (H1 2022: £1,320,500).

Adjusted operating profit

The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance for businesses such as Mercia and is an important alternative performance measure ("APM") of interest to shareholders.

Adjusted operating profit is defined as operating profit before net exceptional performance fees, realised gains on disposal of investments, fair value movements in investments, share-based payments charge, depreciation, amortisation of intangible assets, movement in fair value of deferred consideration and exceptional items. It includes net finance income.

Results reported on an APM basis are denoted by ¹ throughout this review.

A reconciliation of these interim results prepared in accordance with International Financial Reporting Standards ("IFRS") to those presented on an APM basis are as follows:

Revenue

Revenue1 increased 20.7% to £12,181,000 (H1 2022: £10,089,000) and comprised fund management related fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income. Excluding the impact of April 2022's VCT share offer fees received during the period, the like-for-like increase was c.8%.

For the prior interim period to 30 September 2021, revenue included a £2.6million exceptional performance fee from Northern Venture Trust PLC.

Administrative expenses

Administrative expenses1, excluding depreciation, increased 27.0% to £10,102,000 (H1 2022: £7,957,000) and comprised predominantly staff-related, office, marketing and professional adviser costs. Removing the impact of April 2022's VCT share offer related costs, the like-for-like increase was c.11%, reflecting the post-COVID catch-up in staff recruitment together with inflation.

For the prior interim period to 30 September 2021, administrative expenses included variable compensation totalling £1.0million paid to members of Mercia's VCT investment team, in connection with the exceptional performance fee received.

Mercia anticipates that the financial benefits of operational leverage will continue to be realised as its funds under management increase, by both its organic and inorganic initiatives.

Net finance income

Total gross finance income of £1,488,000 (H1 2022: £238,000) arose primarily from the crystallisation of convertible loan interest within the direct portfolio. Gross finance income includes £117,000 (H1 2022: £3,000) of interest received on cash deposits following Bank of England base rate rises during the period. Finance costs of £8,000 (H1 2022: £8,000) comprised interest payable on office leases and the Group's new electric car scheme.

Fair value movements in investments

* Excluding the demerger of Netacea Limited from Intechnica Holdings Limited in the period

Net fair value increases during the period totalled £5,595,000 (H1 2022: £8,708,000) and as at 30 September 2022, the fair value of the Group's direct investment portfolio was £131,545,000 (H1 2022: £110,298,000; FY 2022: £119,558,000).

For the period as a whole, unrealised fair value gains arose in four* (H1 2022: eight) of the Group's direct investments. The largest fair value gain was in respect of VirtTrade Limited, which accounted for £4,003,000 of the total (H1 2022: £5,756,000 fair value gain in respect of Faradion Limited).

There were three* (H1 2022: two) fair value decreases, the largest being £883,000 which arose in respect of Edge Case Games Limited (H1 2022: £2,448,000 fair value decrease in MyHealthChecked PLC).

Share-based payments charge

The £592,000 non-cash charge (H1 2022: £573,000) arises from the net increase in the total number of issued share options held by all employees throughout the Group, ranging from 28 January 2020 to 30 September 2022.

Amortisation of intangible assets

The amortisation charge for the period of £1,017,000 (H1 2022: £1,017,000) represents amortisation of the acquired intangible assets of the VCT fund management business.

Taxation

The components of the Group's tax charge are shown in note 9. The overall tax charge for the period comprises a corporation tax charge on taxable profits, offset by the continued unwinding of the deferred tax liability in respect of the intangible assets arising on the acquisition of the VCT fund management business.

Profit and total comprehensive income for the period

The adjusted operating profit and net fair value increases for the period contributed positively to a consolidated total comprehensive income of £7,003,000 (H1 2022: £11,154,000). This has resulted in basic earnings per Ordinary share of 1.59 pence (H1 2022: 2.53 pence).

Summarised statement of financial position and cash flows

** 440,109,707 Ordinary shares were in issue during the six-month period ended 30 September 2022 and 30 September 2021, and the year ended 31 March 2022

Net assets per share increased by c.3% during the interim period, notwithstanding the recognition of dividends totalling £2,200,000 paid after the period end (H1 2022: c.6% growth after recognising dividends of £1,320,500, paid after that period end).

Intangible assets

The Group's intangible assets consist of goodwill and the intangible asset recognised on the acquisition of the VCT fund management business.

Direct investment portfolio

During the period, Mercia's direct investment portfolio grew from £119,558,000 as at 1 April 2022 (H1 2022: £96,220,000 as at 1 April 2021) to £131,545,000 as at 30 September 2022 (H1 2022: £110,298,000 as at 30 September 2021), a c.10% increase (H1 2022: c.15% increase).

The Group invested £6,403,000 net (H1 2022: £5,370,000) into five existing and one new direct investment, Uniphy Limited (H1 2022: five existing and no new direct investments), with the top 20 direct investments representing 97.4% of the total direct investment portfolio value (H1 2022: 98.5%; FY 2022: 98.6%).

Cash and short-term liquidity investments

At the period end, Mercia had cash and short-term liquidity investments (which is cash on deposit with maturities of between 32 days and three months) totalling £56,112,000 (H1 2022: £52,114,000; FY 2022: £61,284,000), comprising cash of £50,864,000 (H1 2022: £51,880,000; FY 2022: £56,049,000) and short-term liquidity investments of £5,248,000 (H1 2022: £234,000; FY 2022: £5,235,000).

The Group continues to have limited working capital needs due to the nature of its business and during the six-month period generated operating cash inflow of £0.5million (H1 2022: £2.6million inflow).

The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment, corporate and working capital purposes, not yield. As at 30 September 2022, the Group's cash and short-term liquidity investments were spread across four leading United Kingdom banks.

The summarised movements in the Group's cash and short-term liquidity investments during the period are shown below.

Outlook

Investing in young technology businesses or lending to more established SMEs is rarely a linear journey at times of economic instability, such as now. During such times, the continuing availability of cash to those businesses provides the 'oxygen' that they need to execute their long-term growth plans, uninterrupted by near-term cash crunches. As a direct consequence of the significant liquidity held in both our funds under management and on our own balance sheet, Mercia is able to continue to support those businesses without hindering both pillars of its own organic and inorganic growth strategy.

Having successfully grown revenues, profits, cash and NAV per share during the pandemic, Mercia is now navigating this period of significant economic and geopolitical uncertainty, elevated inflation and a downturn in sentiment towards the tech sector, from the fortunate position of debt-free strength.

The Group's excellent staff, supportive stakeholders, strong liquidity, increasing funds under management and growing direct investment portfolio, should enable the Group to remain on track with its Mercia '20:20' strategy through to 31 March 2024.

Martin Glanfield

Chief Financial Officer

Summary Financial Information

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2022

All results derive from continuing operations.

Condensed consolidated statement of financial position

As at 30 September 2022

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

The condensed consolidated interim financial statements of Mercia Asset Management PLC were approved by the Board of Directors on 5 December 2022 and authorised for issue. They were signed on its behalf by:

Dr Mark Payton Martin Glanfield

Chief Executive Officer Chief Financial Officer

Condensed consolidated statement of cash flows

For the six months ended 30 September 2022

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2022

1. General information

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

2. Basis of preparation

The financial information presented in these condensed consolidated interim financial statements constitutes the condensed consolidated financial statements of Mercia Asset Management PLC and its subsidiaries for the six months ended 30 September 2022. 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 2022, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, International Financial Reporting Standards ("IFRS"), and the applicable legal requirements of the Companies Act 2006.

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 2022 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 2022 were approved by the Board on 4 July 2022 and have been delivered to the Registrar of Companies. The Group's independent auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 'Interim Financial Reporting', as adopted for use in the UK.

No new or revised standards or interpretations that have become effective during the period ended 30 September 2022 have had a material effect on the financial statements of the Group.

Although not required by statute or regulation, the financial information contained in these condensed consolidated interim financial statements, which were approved by the Board on 5 December 2022 and authorised for issue, have been reviewed by the Group's independent auditor.

3. Going concern

Based on the overall strength of the Group's financial position, including its significant liquidity at the period end, together with its forecast future operating and investment activities and, having considered the ongoing UK macroeconomic backdrop, geopolitical instability and the war in Ukraine on the Group's operations and portfolio, the Directors have a reasonable expectation that the Group is well placed to manage business risks in the current economic environment and has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing these condensed consolidated interim financial statements.

4. Significant accounting policies

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.

The principal accounting policies applied in the presentation of the condensed consolidated interim financial statements of Mercia Asset Management PLC (the "Group", "Mercia" or the "Company"), including the critical accounting judgements made by the Directors and the key sources of estimation, are consistent with those followed in the preparation of the Group's Annual Report and consolidated financial statements for the year ended 31 March 2022, and have been consistently applied throughout the period ended 30 September 2022.

5. Segmental reporting

The Group's revenue and profits are 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 Operating Segments the Group has only one operating segment, being proactive specialist asset management, because the results of the Group are monitored on a Groupwide 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:

6. Fair value movements in investments

7. Operating profit

Operating profit is stated after charging:

8. Finance income

Finance income is derived from:

9. Taxation

The current UK standard rate of corporation tax is 19% (H1 2022: 19%). The deferred tax credit of £252,000 (H1 2022: £192,000) represents the unwinding of the deferred tax liability recognised in respect of the intangible assets arising on the acquisition of the VCT fund management business.

10. 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 potential 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 basic and diluted earnings per share is based on the following weighted average number of Ordinary shares:

11. Dividends

In October 2021, the Company paid £1,320,500 in respect of its maiden final dividend for the year ended 31 March 2021 of 0.30 pence per share.

In December 2021, the Company paid £1,320,500 in respect of its interim dividend for the year ended 31 March 2022 of 0.30 pence per share.

The final dividend for the year ended 31 March 2022 of 0.50 pence per share, totalling £2,200,500, was approved by shareholders at the Annual General Meeting on 13 September 2022 and was paid after the period end, on 11 October 2022.

An interim dividend for the year ending 31 March 2023 of 0.33 pence per share, totalling £1,452,000, has been declared after the reporting period end and as such has not been included as a liability in these condensed consolidated financial statements, in accordance with IAS 10.

12. Investments

The net change in the value of investments for the six-month period is an increase of £11,987,000 (H1 2022: £14,078,000). The table below reconciles the opening to closing fair value of investments.

* Excluding the demerger of Netacea Limited from Intechnica Holdings Limited in the period

The measurement basis for determining the fair value of investments held is as follows:

1 Valued using methodologies consistent with the Group's accounting policy

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

14. Deferred consideration

Details of the deferred consideration which arose on the acquisition of the VCT fund management business in December 2019 are set out in the Group's consolidated financial statements for the year ended 31 March 2022.

15. Deferred taxation

Under IAS 12 Income Taxes, provision is made for the deferred tax liability associated with the recognition of the intangible asset arising on the acquisition of the VCT fund management business. As at 30 September 2022 and 31 March 2022, the deferred tax liability has been calculated using the substantively enacted tax rate of 25% (H1 2022: 19%).

16. Other distributable reserve

17. 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 consolidated statement of financial position. Subsequent to their initial recognition at fair value, measurements of movements in fair values of financial instruments are grouped into Levels 1 to 3, based on the degree to which the fair value is observable.

The following table gives information about how the fair values of these financial assets and financial liabilities are determined and presents the Group's assets that are measured at fair value. There have been no movements in financial assets or financial liabilities between levels during the current or prior periods. The table in note 12 sets out the movement in the Level 1 and 3 financial assets during the period.

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

Financial instruments in Level 1

The Group had one direct investment quoted on AIM, MyHealthChecked PLC, which is fair valued using the closing bid price as at 30 September 2022, 30 September 2021 and 31 March 2022 respectively.

Financial instruments in Level 3

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

The Group has adopted the International Private Equity and Venture Capital Valuation Guidelines for determining its valuation techniques, which specify that the price of a recent investment represents one of a number of inputs used to arrive at fair value, and uses a single classification for all Level 3 investments.

Note 2 of the Group's consolidated financial statements for the year ended 31 March 2022 provides further information on the Group's valuation methodology, including a detailed explanation of the valuation techniques used for Level 3 financial instruments.

18. Post balance sheet event

On 5 December 2022, the Group completed the acquisition of the entire share capital of Frontier Development Capital Limited ("FDC") for a total consideration of up to £9.5million, plus net cash. The acquisition is for an initial consideration of £5.5million satisfied in cash, plus an amount equal to FDC's net cash position (subject to certain adjustments) as at 30 November 2022. In addition, deferred consideration of up to £4.0million in cash will be payable, contingent upon the achievement of future revenue and net new institutional third-party fundraising targets, for the two years to 30 November 2024.

INDEPENDENT REVIEW REPORT TO MERCIA ASSET MANAGEMENT PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2022 which comprises the condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of cash flows, condensed consolidated statement of changes in equity and notes to the interim financial statements.

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 set of financial statements.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on AIM which require that the half-yearly report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed 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 set of financial statements in the half-yearly financial report for the six months ended 30 September 2022 is not prepared, in all material respects, in accordance with the rules of the London Stock Exchange for companies trading securities on AIM.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants

London, UK

5 December 2022

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Directors, secretary and advisers

Directors

Ian Roland Metcalfe (Non-executive Chair)

Dr Mark Andrew Payton (Chief Executive Officer)

Martin James Glanfield (Chief Financial Officer)

Julian George Viggars (Chief Investment Officer)

Diane Seymour-Williams (Senior Independent Director)

Raymond Kenneth Chamberlain (Non-executive Director)

Dr Jonathan David Pell (Non-executive Director)

Caroline Bayantai Plumb OBE (Non-executive Director)