Mercia Asset Regulatory News (MERC)

Mercia Asset Management PLC

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

Preliminary results for the year ended 31 March 2020

Profitable trading achieved ahead of plan, driven by AuM growth

Mercia Asset Management PLC (AIM: MERC), the proactive, regionally focused specialist asset manager, is pleased to announce its preliminary results for the year ended 31 March 2020.

Financial results

· Assets under management increased by 58% to c.£800million (2019: c.£507million)

· Revenue increased 19.4% to £12.7million (2019: £10.7million)

· Net revenues £0.1million (2019: £1.4million net expenses)

· Net fair value decrease of £15.8million - near term COVID-19 impact (2019: £3.9million increase)

· Operating loss before exceptional items £17.1million (2019: £2.0million profit)

· Loss after tax for the financial year £17.5million (2019: £2.6million profit)

· Loss per share 5.11 pence (2019: 0.86 pence earnings)

· Unrestricted cash and short-term liquidity investments £30.2million (2019: £29.8million)

· Net assets £141.5million (2019: £126.1million)

· Net assets per share 32.1 pence (2019: 41.6 pence)

Managed fund developments

· Third-party funds under management ("FuM") increased to c.£658million (2019: c.£381million) contributing £11.7million in revenue

· FuM increase largely reflects the acquisition of NVM VCT fund management business that added c.£250million in managed funds

· Venture FuM c.£476million (2019: c.£224million)

· Private equity FuM c.£60million (2019: c.£61million)

· Debt FuM c.£122million (2019: c.£96million)

Direct investment portfolio developments

· £17.5million gross invested into 18 portfolio companies during the year including one new direct investment, One Touch Apps t/a Clear Review

· Direct investment portfolio £87.5million (2019: £87.7million)

· Notwithstanding COVID-19 impact, continuing underlying commercial progress made by a number of portfolio companies including nDreams, which continues to be the Group's largest direct investment

COVID-19 update

· Priority of the Group continues to be the safety and wellbeing of all employees, with the business transitioning successfully to remote working without any adverse operational impact

· All portfolio companies risk assessed and tailored support provided where deemed appropriate, with a focus on maintaining long term value potential

· Unrestricted liquidity of c.£290million to invest across FuM portfolios in addition to £30.2million of balance sheet unrestricted cash and short-term liquidity investments

Post year end FuM progress

· £38.2million in new capital raised by NVM VCTs

· Additional £54.3million allocation by British Business Bank from Northern Powerhouse Investment Fund ("NPIF") to existing Mercia managed mandates

· Group accredited to deliver its NPIF debt mandate under the Coronavirus Business Interruption Loan Scheme ("CBILS")

Post year end direct investment progress

· Successful sale of The Native Antigen Company anticipated to realise an 8.4x return and a 65% IRR

· 11 Future Fund applications, significantly increasing the liquidity of the companies within the direct investment portfolio, alongside continued focus on expanding our co-investor base

· New direct investment, MIP Diagnostics, which is developing a highly scalable synthetic antibody platform technology

Mark Payton, Chief Executive Officer of Mercia, commented:

"I am pleased to say that, in many ways, 2019 was a year of significant progress for Mercia as we achieved our goal of trading profitably a year earlier than planned, and significantly increased the scale of our fund management business, both key parts of our three-year strategic plan. A significant driver of this was the acquisition of the three Northern VCT fund management contracts, which helped increase our assets under management ("AuM") by c.58% to c.£800million, alongside bringing additional recurring revenues and a talented VCT investment team. 

"Inevitably, the impact of the COVID-19 pandemic, and the near-term domestic and global economic shock, has negatively affected the holding values of a number of our investee companies, especially within certain sectors such as engineering. Notwithstanding the current reduction in asset price linked fund management revenues, Mercia has begun the new financial year trading profitably, which we expect to continue. During the COVID-19 pandemic, our focus continues to be on the health and safety of our people and ensuring our investee companies have robust cash positions. I am proud of the way we have responded as a business, which has enabled our investment teams to focus fully on supporting our portfolio. We also remain confident in the long-term potential of our direct investment portfolio, which has relatively modest capital needs. We expect the value of this maturing portfolio to accelerate post the COVID-19 pandemic.

"Looking ahead, I believe that Mercia is well placed to build on 2019's strategic progress and position as a leading and trusted provider of regional capital. The growth of our fund management business means we have over £290million of available liquidity which, in addition to the c.£30million of liquidity on our balance sheet, gives us considerable investment capacity to support both our existing portfolio and take advantage of new opportunities at anticipated lower entry prices."

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.

For further information, please contact:

Analyst briefing

Due to restrictions resulting from COVID-19, a meeting for analysts will be held virtually at 9.30am today, 14 July 2020. Analysts wishing to attend this event can register via email at mercia@fticonsulting.com. An audio webcast of this briefing will subsequently be available later in the day via Mercia's web site.

Mercia's 2020 preliminary results will also be available today on the Group's website at www.mercia.co.uk.

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 balance sheet, venture, private equity and debt 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, 19 university partnerships and extensive personal networks, providing it with access to high-quality deal flow. Mercia currently has c.£800million of assets under management and, since its IPO in December 2014, has invested over £96million into its direct investment portfolio.

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

Non-executive Chair's statement

The execution of Mercia's strategy is making good progress

The year ended 31 March 2020 has seen continued positive progress towards the execution of the Group's strategic plan. This is reflected in the underlying progress made by many of the businesses in the Group's direct investment portfolio, as well as Mercia's growing and profitable fund management operations. Notable events during a busy year for Mercia were the successful placing and acquisition, which were announced alongside the Group's interim results on 3 December 2020.

Direct investment portfolio

Valuing the direct investment portfolio on 31 March 2020, so soon into the United Kingdom's COVID-19 related 'lockdown', is inevitably difficult. The Group has consistently complied with the International Private Equity and Venture Capital Valuation Guidelines ("IPEVCVG"). This has resulted in an overall fair value reduction in the direct portfolio of 15.3%. It is important to note that these fair values have been determined at a moment of global economic crisis which will ease over time, and that within the portfolio are companies which are still making rapid commercial progress. Whilst it is possible that not all of the existing portfolio companies will survive current sector-specific challenges, most will, and we expect their fair values to recover over time. Furthermore, for some of the portfolio companies this period will actually see their fair values accelerate faster than would have been the case under normal economic conditions.

The Board remains focused on the progress of the largest balance sheet direct investments, as well as the successful stewardship of the Group's growing fund management activities. The near-term impact on fair values, and therefore the Group's net asset value per share, is frustrating. However, Mercia's strong liquidity position, both within its managed funds and within its own balance sheet, provides the Group with considerable investment capacity to take advantage of anticipated lower entry prices as the current financial year unfolds. Investment returns by a portfolio are often driven more by entry prices than by exit prices and Mercia intends to take full advantage of the investment opportunities, which it anticipates will arise during the coming months.

The investment teams across all of our asset classes, being balance sheet, venture, private equity and debt, have been working closely with their portfolio companies to help as many as possible through the current unprecedented economic slowdown. Mercia's marketing team has also hosted a number of impressive and insightful webinars on a wide range of relevant business support topics, aimed specifically at helping our c.390 portfolio companies.

Strategic review - update on progress

As I referred to in my statement last year, during the early part of 2019 the Board conducted a detailed strategic review of the Group's progress to date, the aim being to continue to scale Mercia over the following three years to become a profitable and self-sustaining investment group. The three key pillars to achieving these strategic objectives are:

· to achieve operating profitability before fair value movements, realised gains and all non-cash charges;

· to expand the Group's assets under management to at least £1.0billion; and

· to 'evergreen' its balance sheet so that the Group's direct investment activities are fully funded by periodic cash realisations from the existing portfolio.

During the year the Group made substantial progress towards the achievement of all three of these objectives, most notably through the successful placing and acquisition in December 2019. Acquisitions compress time and successful ones enhance shareholder value. The early signs for Mercia's most recent acquisition are encouraging.

Since its inception, Mercia has been clear in its determination to trade profitably, so that its annual revenues exceed the total operating costs of the Group. The key to reaching this objective is twofold - continuing to increase the quantum of funds which the Group manages on behalf of third-party stakeholders, whilst, at the same time, maintaining control of costs.

The Group is also determined to reach the point of balance sheet sustainability, such that regular realised cash returns from trade sales and the unwinding of equity stakes in listed companies are sufficient for its annual direct investment needs.

Successful placing and acquisition

On 3 December 2019, Mercia simultaneously announced a proposed placing to raise £30.0million gross and the conditional agreement to acquire three venture capital trust ("VCT") fund management contracts ('the Northern VCT contracts') from NVM Private Equity LLP ("NVM"), together with their VCT investment team, for a total consideration of up to £25.0million. On 20 December 2019, shareholders overwhelmingly approved the issue of 120.0million new Ordinary shares at 25.0 pence per share via the placing, and the acquisition of the VCT fund management business was completed on 23 December 2019. Approximately half of the placing proceeds were used to fund the initial cash consideration for the acquisition and the placing expenses, whilst the remainder has strengthened the Group's ability to continue to invest in the most promising businesses, both in its direct investment portfolio and those showing most promise in its managed funds.

The three Northern VCTs are long-standing, professionally governed and successful listed investment trusts. The broadly regional focus, inclusive culture and sound business values of NVM, and within it their talented VCT investment team, chimed closely with Mercia's own DNA. The Board was very pleased to be able to agree mutually satisfactory terms with NVM and is most grateful to the boards of the three Northern VCTs for their agreement to novate each of the fund management contracts to Mercia. A post-acquisition 100-day integration plan was completed by the financial year end, including welcoming the VCT investment team into our #OneMercia family. For the relatively short period of ownership from acquisition to 31 March 2020, notwithstanding the COVID-19 impact on current VCT portfolio valuations and asset value linked revenues, I am pleased to say that the financial performance of the acquired business met expectations.

Governance and engagement

Throughout the year the Board has focused on the strategic direction of the Group and on executing the priorities identified. The Directors (together with the Group's Chief Operating Officer, Peter Dines) provide a balanced leadership group with relevant experience to drive the creation of shareholder value. Given the evolution of Mercia into a specialist asset manager, I said last year that the Board intended to appoint an additional Non-executive Director with relevant specialist asset management experience. No sooner had the search commenced than Mercia entered detailed negotiations with NVM and it was agreed that the search would be paused until the outcome of the proposed fundraising and acquisition became known. That search has now recommenced in earnest, although it is inevitable that lockdown and the need for social distancing is elongating the selection process.

Since its inception in 2014, the Group has embedded a strong corporate governance ethic in all of its internal and external interactions. As a member of the Quoted Companies Alliance ("QCA") since 2015, and with its fund management operations regulated by the Financial Conduct Authority ("FCA"), Mercia always seeks to act in the best interests of its stakeholders. Proactive engagement with all stakeholder groups is fundamentally important to our Board and you will be able to read many examples of how we do this within this year's Annual Report. In respect of the recently acquired VCT fund management business, I have engaged directly with the chairs of each VCT board and look forward to developing those relationships for the mutual benefit of all parties during the current financial year.

The backbone of our culture is our people

The wellbeing of our staff has always been a priority within Mercia. The current lockdown has helped bring our ever-growing community even closer together; be it via the weekly Zoom staff updates, team-specific check-ins, a weekly Mercia quiz, our many internal Slack channels, our in-house newsletter 'Friday Files' or our ongoing charity and team building initiatives. These daily interactions have helped preserve our group-wide cohesion and common purpose, being to deliver superior long-term returns for our shareholders and fund stakeholders alike.

Since lockdown commenced, there has been an increased focus on the impact of remote working on the mental health and wellbeing of our staff. The increased level of team and group-wide communications reflected above, and the very obvious care and compassion for each other being demonstrated by so many of our staff across the business, speak louder than any words about Mercia's culture. We have been fortunate thus far that the vast majority of our staff remain fit and well, although we have also been saddened to hear that several members of the team have lost relatives due to the virus. Our thoughts are with them and their wider families.

COVID-19

In response to the challenges posed by COVID-19, the Group's focus has been on three priorities: the safety of our employees, continued support for our portfolio companies, and maintaining long-term value creation potential for our shareholders and the investors in our managed funds. Throughout this crisis, Mercia has adhered at all times to UK Government directives and will continue to do so. We have successfully implemented our business continuity plans and the Group's transition to all staff working from home has been remarkably smooth.

Every portfolio company has been risk assessed and all are being closely monitored. We have an investment team of considerable calibre and experience which has assessed the needs of each portfolio company. Our significant balance sheet and managed funds' liquidity will be deployed wisely in the current year, to preserve the inherent future value within each portfolio. As a result of our increased active engagement with all portfolio companies across our asset classes, no staff have been furloughed. Furthermore, given our strong liquidity position, the Group has not needed to seek any government-supported debt funding.

Outlook

Those of us who have been through previous sharp downturns in the UK economy, if perhaps not as stark as this one, will know that the survival of any company, large or small, new or old, often depends on two things - the strength of its balance sheet and the quality of its people. At a time when cash is king, Mercia is blessed in having a very strong balance sheet, with approximately £30million of unrestricted cash, combined with an extremely capable and experienced leadership team, all of whom are pulling together in the same direction.

The results disclosed in this announcement show the tangible progress that the Group has made during the year towards the achievement of its strategic objectives. They also show the near-term impact on asset values arising from the market's reaction to COVID-19 and its likely impact on the global economy.

As our 25 March 2020 business update announcement made clear, where contracted revenues are directly linked to the carrying value of fund or trust assets, those recurring revenues will reduce until the value of the underlying assets recovers. This is likely to be the case for the current financial year and as a result the Group has already taken a number of cost containment actions.

Times such as these can be challenging and difficult but they can also be defining moments. I am proud to be part of #OneMercia, which is full of people who care about the funds we manage, the companies in which we invest or to whom we lend and, most important of all, who care about each other. Thank you to all of those people.

Finally, I should like to thank our shareholders, both new and existing, for your continuing support during this challenging period of economic and social upheaval. Mercia has a focused business model, great people and a strong balance sheet. Hence, notwithstanding the current economic challenges facing our country, I am confident that Mercia will be able to successfully execute its strategic objectives in the months and years ahead.

Ian R MetcalfeNon-executive Chair

Chief Executive Officer's review

These results close the first year into our three-year strategic plan as a proactive, regionally focused, specialist asset manager where we set three measurable targets: (i) to achieve operating profitability before fair value movements, realised gains and all non-cash charges; (ii) to expand the Group's assets under management ("AuM") to at least £1.0billion; and (iii) to 'evergreen' Mercia's balance sheet so that the Group's direct investment activities are fully funded by periodic cash realisations from the existing portfolio.

During the last 12 months we completed the acquisition of the three VCT fund management contracts ('the Northern VCT contracts') from NVM Private Equity LLP increasing our AuM by c.58% to c.£800million. These contracts brought with them additional recurring revenues, which have helped bring us to our goal of trading profitably on a 'net revenues' basis, one year earlier than planned. The transaction also resulted in the talented VCT investment team joining Mercia.

Following the acquisition, 82% of Mercia's AuM is now in third-party funds under management ("FuM") (up from 23% of AuM at our IPO in 2014) with the balance of 18% represented by our consolidated balance sheet. We expect this shift towards FuM to continue as our fund management business develops further.

The £30.0million placing in December 2019 allowed us to complete the VCT acquisition and has provided us with additional capital to support our objective of achieving evergreen status for our direct investment portfolio.

In 2020, revenue increased by 19.4% to £12.7million (2019: £10.7million), which enabled the Group to move from net expenses of £1.4million in 2019 to net revenues of £0.1million, an improvement of £1.5million. Unrestricted cash increased to £30.2million (2019: £29.8million). Largely as a result of the impact of COVID-19 on asset prices, the direct investment portfolio's fair value decreased by 15.3%. This reduction also contributed to net assets at the year end being £141.5million (2019: £126.1million).

COVID-19

The initial outbreak in China in December 2019 immediately impacted on certain supply chains within our direct portfolio, and in addition, the subsequent lockdown of circa one third of the planet resulted in lost or reduced customer demand.

We now face the possibility of one of the largest global economic recessions since the 1930s, with domestic debt exceeding that of World War I. It is my strong belief that there will be a gradual recovery over a 12 to 24-month period and that experienced investors with liquidity and preserved capability will be well-placed.

Mercia's investment model was developed to counter the inevitability of cyclical markets, with many of the team at Mercia having invested through the cycles of 2000 and 2008. Mercia's model is to seek material influence (c.20-40% stakes) in companies that have relatively modest capital needs - typically less than £10.0million - with realistic entry valuations. This, together with our strong liquidity, positions us well to support our investee companies and influence appropriate decision making at this time.

Sadly, in every correction there are both winners and losers. Businesses with near-term profitable business models and business-to-business ("B2B") operations with strong recurring revenue in favoured sectors such as software, digital entertainment, medtech, digital healthcare, diagnostics and biotech will likely benefit. Within our direct investment portfolio, Warwick Acoustics, Impression Technologies (both serving the automotive sector), Crowd Reactive (events management) and LM Technologies (Chinese supply chain) have inevitably suffered. However, others have benefitted; within the biotech sector, OXGENE and The Native Antigen Company; within digital home entertainment, nDreams and Soccer Manager, and Intechnica within online queue management and website defence. Reflecting structural changes and new emerging sectors, we have remodelled or pivoted certain portfolio companies and revised our investment approach to new prospects, to reflect this emerging paradigm.

Fund performance

Mercia's investment model is to target appropriately priced regional businesses seeking modest capital to, in part, protect Mercia from major cyclical corrections. We have performed a thorough COVID-19 analysis across the whole Mercia portfolio and adjusted valuations accordingly. Although our venture and private equity portfolios are not immune to these asset price corrections, we believe that they are weathering the storm, compared to the broader industry, with fund portfolio fair value movements between +10% to -30% as at 31 March 2020.

Venture

Mercia benefits from a diversified venture portfolio of 233 businesses across different sectors and stages of development. As a direct consequence of COVID-19 there has been an inevitable fair value movement in many investee holding values resulting in fund portfolio valuations being adjusted in the year ranging from up by 10% to down by 31%.

Private equity

Our first private equity fund to be fully unwound is another regional fund, the Coalfields Growth Fund ("CGF"), which has generated an internal rate of return ("IRR") of 19.8% and distributions to paid-in capital ("DPI") of 167%. This fund benefitted from a portfolio of eight companies generating five trade sales at multiples above cost. The notable exit of Woodall Nicholson in March 2020 generated a return of c.9.6x on the original cost. The COVID-19 impact on holding values across our active private equity FuM has contributed to a reduction in fair values of 7% to 30%.

Debt

Mercia's debt funds have been actively lending throughout the year and our recent Coronavirus Business Interruption Loan Scheme ("CBILS") accreditation will enable us to further support regional businesses through these challenging times.

Balance sheet

The average holding period of our direct investments is just under three years with an expectation that investments will be realised over a three to seven-year time frame from initial investment. Since Mercia's IPO in December 2014, we have invested £94.7million into our current direct investments, plus a further net £1.3million as a cornerstone investor in four of our managed funds. Thus far we have generated £14.5million in realised returns. The net asset value of our direct investments at the year end was £87.5million (2019: £87.7million), with the overall reduction being largely as a result of the impact of COVID-19.

Portfolio highlights

Some of the investments within our FuM and our direct investment portfolios are starting to create significant value.

Notable direct investments initially supported by our FuM include: OXGENE (a promising synthetic biology business that is growing rapidly, with revenues up by c.240% in the past 12 months), nDreams (a fee-for-service and proprietary content virtual reality developer benefitting from the lockdown period with revenue growth of c.100%), Intechnica (providing bot analytics and website optimisation services and tools, with strong revenue growth of c.50%) and The Native Antigen Company (a leading provider of COVID-19 antigens for diagnostic, vaccine, research and development purposes, with revenue growth of over 200%).

Notable venture portfolio companies within our FuM include: Abingdon Health, which amongst other programmes, is involved in the fight against COVID-19, and is a founding member of the UK's rapid test consortium ("UK-RTC") leading the assay development programme in partnership with the University of Oxford; Axis Spine, which has recently received US Food and Drug Administration ("FDA") approval for its lead product addressing the lucrative US spinal implant sector, valued annually at c.£7billion; and Sense Biodetection, which is developing a point-of-care instrument-free bacterial and viral pathogen diagnostic tool for a variety of infectious agents, including COVID-19.

Outlook

As Chief Executive, my priorities at this time are to ensure that Mercia is financially robust and operationally agile, with strong liquidity and preserved capability. As the economic environment toughens, which I expect it to, this ensures that we are resilient to the downturn and able to support our existing portfolio, whilst being prepared to take advantage of the opportunities that will undoubtedly lie ahead for those with strong liquidity and available capital to deploy.

We have entered our new financial year debt-free and with unrestricted liquidity of c.£290million to invest across our FuM portfolios plus c.£30million for direct investing. We remain focused on transactions of typically less than £10.0million, leveraging the asset classes we have across the Group. We are uniquely positioned to combine equity with debt finance, via our third-party FuM as well as with our proprietary balance sheet capital, where appropriate.

Over the medium term, I believe the economic recovery will be beneficial to the types of businesses that we have traditionally supported, particularly those in medtech and diagnostics, digital entertainment and e-commerce support platforms. Notwithstanding the current reduction in asset price linked fund management revenues, Mercia has begun the new financial year trading profitably, which we expect to continue. The long-term potential of our direct investment portfolio, with its relatively modest capital needs, remains positive and we expect the value of this maturing portfolio to accelerate beyond the COVID-19 pandemic.

None of Mercia's staff have been furloughed during the lockdown period and the Company has not applied for any Government funding schemes, save on behalf of our portfolio companies, as we continue to behave as a responsible and supportive regional investor. I have confidence in Mercia's intrinsic strengths and these are reflected in our own core values. During the recent period of remote working, Mercia's 93 employees have been remarkably resilient and supportive of each other and of those around us. I am proud of the work we are doing in the regions as we seek to strengthen our portfolio, as a trusted partner to regional business and thus safeguard employment and economic prospects. Internally, we reference the Group as #OneMercia and I welcome the excellent people who have recently joined us through the acquisition of the Northern VCT contracts. I would like to thank our entire valued team for their continued drive, commitment and professionalism.

Dr Mark Payton

Chief Executive Officer

Chief Investment Officer's review

At the beginning of the financial year I encouraged our investment teams to focus on two areas that will accelerate value creation across our portfolios: building out the management teams of our investee companies, where appropriate, through the addition of chairs and non-executive directors via Mercia's talent platform; and further developing our network of co-investors. We have made significant progress on both fronts, although the positive effect on our financial results has been masked to a large degree by the current impact on asset prices from the COVID-19 pandemic.

Deepening management capabilities

We have focused on increasing the collective capability of the management teams that we are backing. Through our talent resourcing capabilities, we have introduced companies to experienced board-level support, helped our portfolio make 33 senior non-executive director board appointments and enabled the development of powerful leadership teams. We are also building a collective of successful managers with complementary skills to support our portfolio, including CFO input, sales process design, new market entry and regulatory expertise.

Mercia's network is an integral part of our approach to adding value by building a strong base of experienced connections, underpinned by the online and offline communication we offer. We make a Slack channel available to all of our CEOs to enable them to correspond directly with each other, to share and seek ad hoc advice and commercial insight, thereby creating a network of opportunities across the portfolio. We see this as an invaluable informal mentoring and development tool. Our connected approach means that we can help our portfolio companies' management teams take advantage of the opportunities ahead of them and provide them with guidance as they navigate the inevitable issues associated with growing and scaling young businesses.

Expanding our network of co-investors

Expanding our network of like-minded co-investors is critical to ensure that as our portfolio continues to mature and grow, we can provide companies with the scale-up capital required, while bringing along partners that share our vision and expand our opportunities for an exit at the right time. Our efforts during the year resulted in 12 new investment partners joining syndicates across our portfolio.

COVID-19

The COVID-19 pandemic has been an incredibly difficult and stressful time for our entrepreneurs and management teams; we have seen them act decisively and sensibly at a time of great uncertainty and I pay tribute to them all.

At Mercia we reacted swiftly to the lockdown. Our priority was to ensure that our entire portfolio understood the critical need for cash management, extending their cash runways to enable them, and Mercia, to assess the longer-term effects of COVID-19 on their businesses. We conducted a survey of the portfolio at the beginning of the lockdown and quickly crafted and delivered a series of webinars to support the portfolio around their critical concerns, ranging from cash management and how to access the various government support schemes, to post-COVID-19 strategy and recovery, ensuring that support went beyond firefighting, looking at how to manage the exit from lockdown and position businesses favourably to take advantage of opportunities that might lie ahead.

In early March, we assessed the likely medium and longer-term effects of COVID-19 across our portfolio of companies based on 13 criteria including reliance on supply chains, management response, business disruption, balance sheet strength, co-investors and cash runway. The results provided immediate visibility of priorities and needs. Our newly acquired venture capital trust ("VCT") operation was able to review and report on its entire portfolio of c.60 companies, including a revaluation of the net asset position ahead of the £38.2million successful fundraise, announced on 3 April 2020. We are conducting regular reviews to establish whether any COVID-19 related impact on our entire portfolio of companies represents a temporary pause on progress or a fundamental challenge to their business model.

We are in the strong position of having significant liquidity of c.£320million across all our asset classes. We also have the analytical tools and skills within the team to allocate funds effectively, both in our existing portfolio and in new opportunities for the long-term benefit of our shareholders and investors in our funds.

Portfolio update

Managed funds: five exits and good performance by debt funds

Investment and lending performance are at the heart of what we do. Our third-party managed funds continued their prior year momentum, performing well against their mandates. Across our managed funds, we invested a total of £59.7million into 109 existing and 46 new portfolio companies.

Five exits were completed in the year which have now delivered a total return of £16.1million over the holding period of the investments. The most significant was Woodall Nicholson, a company in our private equity ("PE") funds which was sold in late March 2020 to another PE house, delivering a 9.6x return on the original cost. The Coalfields Growth Fund ("CGF") invested £1.0million into Woodall Nicholson in 2013, realised a 1.9x return on cost in 2016 from a partial sale to the Business Growth Fund and, in total, realised £9.3million. CGF as a whole has now generated an IRR of 19.8%.

A second example is Granby Marketing Services, a marketing logistics company in our PE funds that delivered a 2.1x return on cost via a management buyback. The EV Growth Fund ("EVGF") invested £1.4million into the company in 2013.

Until the arrival of COVID-19 our debt funds were also maintaining their good overall performance. Our Finance Yorkshire Loan Fund ("FYLF") now has less than £0.1million remaining to be repaid from a total of £41.6million lent since the last recession in 2010. It has returned a total of £44.5million; a legacy which is c.£4million greater than was originally anticipated from this 'Gap' Fund.

Managed funds highlights

Mercia continued to invest carefully and selectively during the challenging environment created by COVID-19 in the fourth quarter of the financial year. We did experience a slowdown in demand for funding, with equity syndicates weakening across the portfolio as other institutional investors and angel groups scaled back their investment activity. This placed a higher burden on the managed funds to provide greater financial support to the portfolio in the form of follow-on funding.

Over the last year, the Midlands Engine Investment Fund Proof-of-Concept Fund ("MEIF POC"), a £23.5million fund, invested £3.8million into 18 companies, 15 follow-on investments into existing portfolio companies and three new deals: Industrial Phycology ('I-PHYC'), a pre-revenue start-up company developing a modular wastewater treatment system based on their novel algal bioreactor; Iventis, a Lincolnshire-based software business whose core product is a platform designed for a large number of users to collaboratively plan complex operations or major events such as the Olympics; and Ebate, a software-as-a-service ("SaaS") business. The MEIF POC Fund was established in 2018 to provide early-stage capital to innovative businesses across a wide area of the Midlands.

In the North of England, the Northern Powerhouse Investment Fund ("NPIF"), with a mandate to deploy c.£58million in both equity and debt to SMEs in the region, completed 32 transactions investing a total of £11.8million, of which £7.0million (c.60%) was provided to 10 new businesses across the Yorkshire, Humber and Tees Valley region, with the balance of £4.8million invested into 22 follow-on investments across 15 existing portfolio businesses. Cumulatively, since being awarded the mandate in February 2017, the NPIF equity fund has invested £36.0million into a portfolio of 47 businesses as at 31 March 2020. In April 2020, Mercia's NPIF equity mandate was increased by a further £23.7million.

Within the NPIF equity fund is Abingdon Health, a lateral flow rapid test manufacturer, which has been involved in the fight against COVID-19. It is one of the founding members of the UK's rapid test consortium ("UK-RTC") and has led the assay development programme in partnership with the University of Oxford.

The North East Venture Fund ("NEVF") had a solid year, concluding 13 transactions and investing a total of £4.2million. Of those transactions, eight were new deals and five were follow-on investments into existing portfolio companies. The Northern VCTs co-invested directly alongside NEVF in Nutshell Software, demonstrating the value of our Complete Connected Capital.

During the year, Mercia's debt team provided £14.5million of funding in 46 transactions via the EV SME Loans Fund and the NPIF debt fund. In April 2020 Mercia's NPIF debt mandate was increased by a further £30.6million, increasing the size of the NPIF debt fund to over £80million to support profitable SMEs as they seek to recover from the impact of COVID-19. Notable amongst the new loans made was one to Rothband, where Mercia supported the management of this medical imaging business in their buy-out of an institutional investor and another to Forward2me, an online logistics business, where Mercia enabled the buy-out of a retiring shareholder.

Private equity continued its strong performance up to early March 2020. Enterprise Ventures Growth Fund II ("EVGII") invested £10.7million, completing three new investments together with one follow-on investment. Most notable amongst the new investments was Total Resources Holdings, an MBO that also included £2.0million of debt support from other Mercia third-party funds.

Both EVGF and CGF are now in their divestment phase although each has already returned the investors' original capital, cleared the hurdle and are now paying periodic carried interest to Mercia.

Direct investments - operational progress; valuations impacted by COVID-19

Valuations

At the half year we reported £3.2million of net upward fair value movements across our direct investment portfolio, and this trend was set to continue through the second half of the financial year, until the emergence of COVID-19. As at 31 March 2020 the value of the Group's direct investment portfolio was £87.5million (2019: £87.7million). This reflects a downward movement for the full year of £15.8million after net investment in the year of £15.7million (2019: £17.7million).

We have recorded fair value gains in respect of OXGENE (£1.6million), Voxpopme (£1.0million), The Native Antigen Company (£0.6million), and Soccer Manager (£0.1million) in line with our valuation policy, which follows the International Private Equity and Venture Capital Valuations Guidelines ("IPEVCVG"). The fair value gains in OXGENE and Voxpopme relate to third-party investment and in the case of The Native Antigen Company, as the business is increasingly profitable and cash generative, the uplift in fair value reflects the tangible progress made.

We have taken a careful case-by-case review of the likely effects of COVID-19 on each of our portfolio companies and where we see that the enterprise value has been affected by either delay, uncertainty, or potential dilution to our stake, we have adjusted the carrying values. We see the effects of COVID-19 being potentially significant within the automotive sector, as original equipment manufacturers ("OEMs") struggle with lower demand, supply chain issues and their own funding situations. This is likely to slow progress at Warwick Acoustics and Impression Technologies. We have therefore decreased the carrying values of these companies by £5.3million and £3.1million respectively.

In the events sector, Crowd Reactive has been materially impacted by COVID-19. At the time of the announcement of our interim results in December 2019, the company was trading well and was discussing a new funding round with a number of investors; we therefore provided new working capital to deliver on a record order book for 2020. However, since February 2020, the order book has dissipated with little visibility of a return to normality. We have therefore taken the difficult decision not to support the company further and have accepted an offer from management to a partial repayment of our investment, resulting in a £2.1million fair value decrease as at 31 March 2020.

Other fair value decreases reflective of COVID-19 related sentiment included LM Technologies (£2.1million) and Eyoto Group (£0.9million). We also recognised a fair value decrease of £1.4million in Concepta, an investment which is listed on AIM so is valued at its bid price as at 31 March 2020. Following a period of underperformance, the company has undergone significant management changes, and as a sign of our continued faith in its products, market opportunity and new team, we participated in the company's successful £1.9million placing in April 2020.

Investment activity

We have continued to support our largest and most promising assets, with both capital and resource. £9.0million of the £15.7million invested during the year was allocated across our top 10 assets including nDreams, Intechnica, Medherant, Voxpopme, Impression Technologies and Faradion. As many of our direct investment portfolio companies now look to scale their growth, our aim remains to build and/or maintain material equity stakes at c.20-40%, whilst increasingly looking to bring in new third-party capital.

We made one new direct investment during the year into One Touch Apps, trading as Clear Review, a company from our third-party funds. Clear Review is a SaaS business providing HR management tools. HR technology remains an exciting sector, indicative of the overall momentum of Clear Review, which passed £2.0million in annual recurring revenue ("ARR") in December 2019, less than a year after reaching its £1.0million ARR milestone. At the end of March 2020, the company's ARR run rate was £2.3million.

Mercia first invested in Clear Review in 2018 through its managed funds and made an initial £0.5million direct equity investment alongside co-investor Albion VCT in June 2019.

Direct investments: operational highlights

The last year was significant for a number of our businesses, with nDreams, OXGENE, Soccer Manager and Clear Review all doubling their revenues and Voxpopme and The Native Antigen Company also showing sizeable revenue growth.

It is also worth noting the progress made by Intechnica, Medherent and Faradion.

Intechnica, a digital performance company, grew revenues by c.50% in the year to c.£9million, winning new clients for its bot management product, Netacea. Netacea was identified by Forrester as "leading the pack" in the sector. Its virtual waiting room product for ecommerce businesses has also gained traction, winning projects with Ocado and Pets at Home. 

Medherant, a transdermal drug delivery company that has two unpartnered lead products - an Ibuprofen patch at clinical stage and a pre-clinical product addressing smoking cessation - has entered into a partnership with Cycle Pharmaceuticals to develop new products using its proprietary TEPI Patch® technology. This partnership demonstrates the potential of further licensing opportunities and the commercialisation of Medherant's innovative technology for the administering of medicines to patients with rare neurological disorders.

Faradion has also made significant progress with its battery cell technology, developing a number of partnerships and announcing its first order from its joint venture partner, ICM Australia, for its high-energy sodium-ion batteries. Faradion's sodium-ion technology provides similar performance to conventional chemistries, while replacing expensive materials such as cobalt and lithium with the far more abundant sodium. We are encouraged by Faradion's potential, as unlike lithium-ion batteries, its sodium-ion batteries have exceptional thermal stability and can be safely transported and maintained at zero volts.

Portfolio overview and liquidity

Post-period end developments

Investment activity has continued since the financial year end with new funding rounds for OXGENE, Eyoto Group and Medherant, into which we have invested £1.0million, £0.5million and £1.4million respectively. We have also continued to provide financial support to W2 Global Data Solutions, Warwick Acoustics and VirtTrade, as these companies make progress.

Concepta announced its £1.9million placing in April 2020, with Mercia investing £0.7million (£0.2million from its balance sheet and £0.5milion from its EIS funds). The company now has a new executive team, strategy and reduced cash burn rate.

Also in April 2020, we were pleased to announce that the three Northern VCTs had raised £38.2million in new capital through the share offers that were launched in January 2020, despite what became a very challenging market environment. In addition, continuing confidence in our reputation and track record was expressed through the additional £54.3million allocation from the British Business Bank ("BBB") into Mercia's two existing investment mandates covering the Northern Powerhouse region, with £23.7million being allocated to Mercia's existing NPIF equity fund and £30.6million to the NPIF debt fund. Shortly thereafter, we were delighted to announce that we were accredited by BBB under CBILS, which enables us to increase our lending to all eligible regional SMEs, further underpinning both our leadership in regional capital deployment and our Complete Connected Capital model, as we entered the new financial year.

On 1 July 2020 MIP Diagnostics ("MIP") became a new direct investment. Mercia's balance sheet committed £0.5million alongside £0.6million from Mercia's EIS funds as part of a £5.1million syndicated funding round. A spinout from the University of Leicester (a partner university) and originally supported via Mercia's managed third-party funds in 2015 (which hold a c.28% equity stake in addition to Mercia's direct stake), MIP has developed a disruptive platform technology seeking to address the c.$85billion antibody market using synthetic antibodies via a process known as Molecularly Imprinted Polymers. The MIP deal also demonstrates our continued focus on expanding our networks of co-investors, with the Business Growth Fund, Downing Ventures and Calculus Capital as co-investment partners.

We are also working with the British Business Bank's Future Fund on a number of investments into companies across our portfolios, including 11 in our direct portfolio, to extend investee company liquidity through to 2021.

On 9 July we announced the profitable sale of The Native Antigen Company Limited ("NAC") to LGC, a global leader in the life sciences tools sector, for a total cash consideration of up to £18.0million. Mercia held a 29.4% fully diluted direct holding in NAC at the date of sale and will receive initial cash proceeds of £4.8million, with up to a further £0.4million receivable upon finalisation of customary closing working capital calculations. The sale is anticipated to generate an 8.4x return on its original direct investment cost and a 65% internal rate of return ("IRR").

Mercia first invested in NAC in 2011 through its third-party managed funds (which as at 31 March 2020 held an additional combined stake of 20.9%) and subsequently, from its own balance sheet as a direct investment in December 2014. In addition to the direct investment returns, the sale will generate a 12.1x return on a blended third-party managed funds investment cost and a 31% funds IRR. Mercia has proactively supported NAC since its first day of trading, including representation from Mercia's Chief Operating Officer, Peter Dines, as a non-executive director on the NAC board through to exit.

NAC was founded in 2010, as a divestiture from a University of Birmingham spinout company, and has since become one of the world's leading suppliers of infectious disease reagents, widely acknowledged as being a primary source of reagents for the study of emerging diseases. 

Summary

These results reflect the strength of our diverse investment platform, albeit currently impacted by COVID-19, and the experienced team that has managed these investments against a deteriorating macroeconomic backdrop. We remain cautious investors and our focus on investing in regional companies with moderate capital needs, where we believe that we can add value, has ensured that as we enter the new financial year we do so with a well-assembled portfolio of companies that are aware of the challenges and opportunities that lie ahead. We will continue to add selectively to the direct investment portfolio over the coming financial year and will continue to support both it and our fund portfolios, to deliver strong long-term investment performance for our shareholders and fund investors.

Julian Viggars

Chief Investment Officer

Chief Financial Officer's review

Notwithstanding the arrival of COVID-19 and its near-term impact on UK businesses, including many of those companies making up the Group's direct investment portfolio, the year to 31 March 2020 has been one of considerable change and positive progress for Mercia Asset Management PLC, not least in its transition from annual net expenses to net revenues one year ahead of plan.

Also notable amongst these positive changes were the successful £30.0million placing and the acquisition of the venture capital trust ("VCT") fund management business of NVM Private Equity LLP ("NVM") in December 2019.

Placing of 120,000,000 shares raising £30.0million gross proceeds ('Placing')

On 3 December 2019 Mercia announced a conditional placing of, in aggregate, 120,000,000 Placing shares at 25.0 pence per Placing share. Shareholders overwhelmingly approved the Placing at a General Meeting held on 20 December 2019 and the new shares were admitted to trading on AIM on 23 December 2019. Placing commission and related expenses totalled £1.9million gross.

The net proceeds of the Placing were used to fund the cash component of the initial consideration and related transaction expenses in respect of the acquisition of NVM's VCT fund management business. In addition, the proceeds provide further balance sheet capital to enable the Group to continue to selectively invest in its existing balance sheet direct investments, as well as new direct investments which currently sit within its third-party managed funds, that are expected to deliver attractive returns in the future.

Acquisition of the VCT fund management business of NVM Private Equity LLP

On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP, which consisted of the acquisition of the three fund management contracts ('the Northern VCTs') and the transfer of NVM's VCT investment team, for a total maximum consideration of £25.0million, comprising a combination of cash and new Ordinary Mercia shares. The initial consideration was £16.6million, comprising £12.4million in cash which was satisfied on completion and £4.2million which was satisfied by the issue of 16,800,000 initial consideration shares at a price of 25.0 pence per share, being the same as the Placing price. The initial consideration shares were admitted to trading on AIM on 27 December 2019.

Deferred consideration of up to £8.4million will also be payable, contingent upon certain conditions being met. The deferred consideration comprises £6.3million in cash, payable in three equal instalments on the first, second and third anniversaries of completion, provided that no termination notice has been served by any of the three Northern VCTs before each respective anniversary payment date, and £2.1million payable in new Ordinary Mercia shares. 50% of the deferred consideration shares will be payable if the Group has received at least £16.0million of fees in respect of the VCT fund management contracts during the three years post completion. The remaining 50% of the deferred consideration shares will be allotted and issued if, during the same three-year period, the three Northern VCTs collectively raise at least £60.0million in new capital. If either or both of these conditions are met the number of new Ordinary shares to be issued to satisfy the deferred share consideration will be calculated based on the average of the daily closing mid-market price for an Ordinary Mercia share, for each of the five days immediately preceding the date of issue.

Summarised consolidated financial statements

The consolidated financial statements for the year ended 31 March 2020 summarised below include just over three months of trading for the acquired business, which has been integrated within Mercia during the first 100 days of ownership.

Summarised consolidated statement of comprehensive income

Notwithstanding the near-term impact of COVID-19 on direct portfolio fair values, Mercia continues to have strong liquidity, is now operating profitably (before fair value movements, realised gains and all non-cash charges) and has a direct investment portfolio from which to drive future increases in both earnings per share and net asset value per share.

Revenue increased 19.4% to £12.7million (2019: £10.7million). The Group's revenue increase was largely due to the post-acquisition contribution of the acquired VCT fund management business.

Staff and administrative expenses increased by 4.5% to £12.7million (2019: £12.1million). The overall increase in these costs was due to the inclusion of the post-acquisition operating costs of the acquired VCT fund management business.

Net revenues increased by £1.5million compared with 2019 (net expenses) largely, although not exclusively, as a result of the overall post-acquisition contribution of the VCT fund management business.

During the year the Group invested £17.5million (2019: £19.4million) into 17 existing and one new direct investment (2019: 15 and two respectively). It also received investee company loan repayments totalling £1.8million (2019: £1.7million). Direct investment momentum has been positive at the start of the new financial year and is expected to selectively continue into both existing and new direct investments.

Net fair value decreases during the year totalled £15.8million (2019: £3.9million increase) and as at 31 March 2020 the fair value of the Group's direct investment portfolio was £87.5million (2019: £87.7million). This decrease was predominantly due to the near-term impact of COVID-19 on direct investment portfolio fair values, details of which are given in the Chief Investment Officer's review.

Net assets at the year end were £141.5million (2019: £126.1million) resulting in an overall decrease in net assets per share (being net assets of £141.5million divided by 440,109,707 shares in issue) to 32.1 pence (2019: 41.6 pence, being net assets of £126.1million divided by 303,309,707 shares in issue). This reduction has been due to the dilutive effect of the Placing and the decrease in the fair value of the direct investment portfolio, due predominantly to the impact of COVID-19.

Within net assets, cash and short-term liquidity investments totalled £30.7million (2019: £30.4million), including £0.5million of cash held on behalf of third-party EIS investors (2019: £0.6million).

The net fair value decrease contributed materially to result in an overall consolidated total comprehensive loss for the year of £17.5million (2019: £2.6million profit). This in turn has resulted in a loss per Ordinary share of 5.11 pence (2019: 0.86 pence earnings).

Alternative performance measures

The Group has always believed that the measurement and reporting of both 'net revenues/(expenses)' and 'net asset value per share' are important alternative performance measures of interest to investors. The reporting of net revenues/(expenses) enables a clear understanding of the impact of the Group's operating model on net asset value enhancement or erosion, particularly historically where operating costs have exceeded revenue.

From 1 April 2020 the Group will substitute 'adjusted operating profit' for net revenues/(expenses), as it is a more generally recognised alternative performance measure for specialist asset managers. From Mercia's perspective and for comparison purposes, the difference between the measurement of net revenues/(expenses) and adjusted operating profit is that adjusted operating profit will include net finance income and exclude depreciation. Had Mercia adopted this alternative performance measure for the year ended 31 March 2020 it would have resulted in adjusted operating profit of £0.5million (2019: £0.8million loss). The table below provides a bridge between the two alternative performance measures for the years ended 31 March 2020 and 31 March 2019.

The table below provides a reconciliation from adjusted operating profit/(loss) before exceptional items to operating (loss)/profit before exceptional items for the years ended 31 March 2020 and 31 March 2019.

Similarly, the reporting of net asset value per share provides an indication 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.

Goodwill and acquired intangible assets

The consolidated balance sheet includes goodwill of £16.6million (2019: £10.3million) and acquired intangible assets of £20.1million (2019: £0.6million). £6.3million of the goodwill and £19.8million of the intangible assets value arose as a result of the Group's acquisition of the VCT fund management business in December 2019. £7.9million (2019: £7.9million) of the goodwill and £0.3million of the intangible assets value arose as a result of the Group's acquisition of Enterprise Ventures Group Limited in March 2016. The balance of the goodwill arose on the acquisition of Mercia Fund Management Limited in December 2014. The intangible assets are separately identifiable assets arising from the VCT fund management contracts with Northern Venture Trust PLC, Northern 2 VCT PLC and Northern 3 VCT PLC (the 'Northern VCT Contracts') and Enterprise Ventures' fund management contracts (the 'EV Contracts'). The fair value of the Northern VCT Contracts' intangible assets is being amortised on a straight-line basis over 10 years. The fair value of the EV Contracts' intangible assets is being amortised on a straight-line basis over the average duration of the remaining fund management contracts from the date of acquisition. The total amortisation charge of £852,000 (2019: £301,000) in the consolidated statement of comprehensive income represents the amortisation for the year ended 31 March 2020. £551,000 of the total charge relates to the Northern VCT Contracts with the balance relating to the EV Contracts.

Revenue

Total revenue of £12,747,000 (2019: £10,675,000) comprised fund management fees, initial management fees from new investments, investment director monitoring fees and sundry business services income.

Other administrative expenses

Total other administrative expenses of £12,661,000 (2019: £12,115,000) consisted of all staff related, office, marketing and professional adviser costs.

Net revenues

Net revenues of £86,000 (2019: £1,440,000 net expenses) represents total revenue less all staff and administrative expenses.

Fair value movements in investments

For the year as a whole, unrealised fair value gains arose in four (2019: 12) of the Group's 25 (2019: 26) direct investments. The largest fair value gain, being Oxford Genetics (trading as OXGENE), was £1,582,000. There were 10 (2019: three) fair value decreases, the largest being £5,313,000 for Warwick Acoustics, predominantly due to the current impact of COVID-19 on asset values in general. The reduction in overall fair values for the year as a whole was 15.3%, measured by expressing the net fair value unrealised loss as a percentage of the opening fair value of the direct investment portfolio plus the net cash invested during the year (2019: 4.7% increase). For the majority of the direct investment portfolio we anticipate a recovery in fair values over time.

Share-based payments charge

The £528,000 (2019: £171,000) non-cash charge arises from the issue of share options to Executive Directors and other employees of the Group ranging from 24 April 2017 to 31 March 2020.

Amortisation of intangible assets

The amortisation charge of £852,000 (2019: £301,000) represents the amortisation of the acquired intangible assets of the Northern VCT Contracts and the EV Contracts for the year ended 31 March 2020.

Exceptional items

During the year the Group incurred exceptional costs of £695,000 (2019: £nil). Of this total, £297,000 are transaction costs incurred in relation to the acquisition of the VCT fund management business. The balance of £398,000 are staff related costs incurred in connection with a restructuring which took place in March 2020. The transaction costs and staff related costs are exceptional non-trading and non-recurring costs and have therefore been accounted for as exceptional items.

Net finance income

Finance income of £246,000 (2019: £562,000) comprised loan interest and redemption premiums received on loans repaid by investee companies during the year, as well as interest receivable earned on the Group's cash and short-term liquidity investments.

Finance costs of £26,000 (2019: £nil) comprised interest payable on leases, arising from the application of IFRS 16, 'Leases'.

Taxation

The tax credit of £159,000 (2019: £54,000) represents the annual unwinding of the deferred tax liability recognised in respect of the intangible assets which arose on the acquisition of both the Northern VCT Contracts and the EV Contracts.

Balance sheet and cash flows

Net assets at the year end of £141,460,000 (2019: £126,065,000) were predominantly made up of the Group's direct investment portfolio, together with cash and short-term liquidity investments. The Group continues to have limited working capital needs due to the nature of its business.

Direct investment portfolio

At the latter end of the year Mercia's direct investment portfolio declined in fair value to £87,471,000 (2019: £87,659,000). The table below lists the Group's investments by value as at 31 March 2020, including a breakdown of the net cash invested during the year, fair value movements for the year as a whole and the fully diluted equity percentage of each investee company owned.

Investee company loan repayments

Mercia is focused on creating shareholder value through its asset management operations, including investment in, development of and at the appropriate time, exit from (predominantly through trade sales) its direct investments. The Group supports its direct investments via both equity and loan instruments. During the year loan repayments of £1.8million (2019: £1.7million) were received by Mercia from Impression Technologies, Warwick Acoustics and Crowd Reactive.

Cash and short-term liquidity investments

At the year end Mercia had total cash and short-term liquidity investments of £30,653,000 (2019: £30,398,000) comprising cash of £24,438,000 (2019: £25,210,000) and short-term liquidity investments of £6,215,000 (2019: £5,188,000), including £467,000 (2019: £629,000) of cash 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 working capital purposes, not yield. At the year end the Group's cash and short-term liquidity investments (which is cash on deposit with maturities between three and six months) were spread across four leading United Kingdom banks.

The summarised movement in the Group's cash position during the year is shown below.

Notwithstanding the near term impact of COVID-19 on asset values and revenues which are directly linked to asset values, Mercia has made significant positive progress during the year. Once the impact of the pandemic subsides, the underlying potential of the Group's balance sheet portfolio and deal flow pipeline via its managed funds will re-emerge, providing positive momentum for the Group's future prospects.

Martin Glanfield

Chief Financial Officer

Summary Financial Information

Consolidated statement of comprehensive income

For the year ended 31 March 2020

Consolidated balance sheet

As at 31 March 2020

Consolidated cash flow statement

For the year ended 31 March 2020

Consolidated statement of changes in equity

For the year ended 31 March 2020

Notes to the consolidated financial statements

For the year ended 31 March 2020

1. General information

Mercia Asset Management PLC ('the Group', 'Mercia') 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 AIM market of the London Stock Exchange. The registered office address is Mercia Asset Management PLC, Forward House, 17 High Street, Henley-in-Arden, B95 5AA. Mercia Asset Management PLC's Ordinary shares were admitted to trading on AIM on 18 December 2014.

2. Basis of preparation

The summary financial information included in this announcement has been extracted from the audited financial statements of the Group for the year ended 31 March 2020, which have been approved by the Board of Directors. The Group's auditor has consented to the publication of this announcement. The summary financial information does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006 (the 'Act'). The auditor's report on the financial statements for the year ended 31 March 2020 was unqualified and did not contain any statement under section 498 of the Act. The Group's Annual Report and financial statements will be delivered to the Registrar of Companies in due course.

The financial statements have been prepared on an historical cost basis, as modified by the revaluation of certain financial assets and financial liabilities in accordance with International Financial Reporting Standard ("IFRS") 9 'Financial Instruments'. The accounting policies presented in the summary financial information are consistent with those set out in the audited financial statements.

3. Going concern

On 30 January 2020, the World Health Organisation declared the outbreak of coronavirus ("COVID-19") to be a public health emergency of international concern. COVID-19 presents the biggest risk to the global economy and to individual companies since the 2008 financial crisis and has had a severe impact on economic growth forecasts worldwide. The impacts of COVID-19 are not yet all apparent and the position will remain fluid until the length and extent of the crisis becomes evident. Clearly, however, not all industries or companies will be impacted to the same degree. The effects will be felt in a number of areas across the Group and its portfolio companies. Mercia continues to monitor and follow closely the information released from the UK Government and the Directors continue to monitor the impact that the COVID-19 pandemic has on the Group and its portfolio companies. The full extent to which the COVID-19 pandemic may impact the Group's future results, operations and liquidity is uncertain.

The Directors have made an assessment of going concern, taking into account both the Group's current performance and its outlook, which considered the impact of the COVID-19 pandemic, using the information available up to the date of issue of this summary financial information. As part of this assessment the Directors considered:

· an analysis of the adequacy of the Group's liquidity, solvency and regulatory capital position. The analysis used has modelled a number of adverse scenarios to assess the potential impact that COVID-19 may have on the Group's operations and portfolio companies. The Group manages and monitors liquidity regularly ensuring it is adequate and sufficient and this is supported by its monitoring of investments, operating expenses and receipt of portfolio cash income. In addition, Mercia raised £30.0million gross proceeds through its successful placing in December 2019. As at 31 March 2020 liquidity, comprising unrestricted cash and short-term liquidity investments, remained strong at £30.2million (31 March 2019: £29.8million);

· any potential valuation concerns with respect to the Group's direct investment portfolio as set out in this summary financial information. The approach to valuations was consistent with the normal process and valuation policy. A key focus of the portfolio valuations at 31 March 2020 was an assessment of the impact of the COVID-19 pandemic on each portfolio company, considering the performance before the outbreak of COVID-19, as well as the projected short-term impact on the ability to generate earnings and cash flows, and also the longer-term view of each company's ability to recover;

· the operational resilience of the Group's critical functions, which includes the wellbeing of its staff and the resilience of its IT systems. COVID-19 has emphasised the importance of Mercia's and its portfolio companies' focus on keeping employees safe, motivated and able to continue to fulfil their roles effectively where possible; and

· an assessment of the Group's supplier base, considering any single points of failure and contingency plans, should suppliers be deemed at risk.

Based on the overall strength of the Group's balance sheet, including its significant liquidity position at the year end, together with its forecast future operating and investment activities, and having considered the impact of COVID-19 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 a period of at least 12 months from the date of this announcement. Accordingly, the Directors continue to adopt the going concern basis in preparing this summary financial information.

4. Significant accounting policies

Basis of consolidation

Subsidiaries and subsidiary undertakings are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The Group accounts for business combinations using the acquisition method from the date that control is transferred to the Group. Both the identifiable net assets and the consideration transferred in the acquisition are measured at fair value and transaction costs are expensed as incurred. Goodwill arising on acquisitions is tested annually for impairment. Deferred consideration payable to the vendors is measured at fair value at acquisition and assessed annually with particular reference to the conditions upon which the consideration is contingent.

New standards

The following new standards became effective in the current financial year:

IFRS 16, 'Leases' - explained in more detail below

Amendments to IFRS 3, 'Business Combinations'

Amendments to IFRS 9, 'Financial Instruments'

Amendments to IAS 12, 'Income Taxes'

Amendments to IAS 19, 'Employee Benefits'

Amendments to IAS 23, 'Borrowing Costs'

Amendments to IAS 28, 'Investments in Associates and Joint Ventures'

Annual Improvements to IFRS Standards 2015-2017 Cycle

There are no other IFRSs or IFRIC interpretations that are effective that would be expected to have a material impact on the Group.

IFRS 16, 'Leases', is effective for accounting periods beginning on or after 1 January 2019. It replaces IAS 17, 'Leases' and introduces new or amended requirements with respect to lease accounting.

The new standard introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low-value assets when such recognition exemptions are adopted. The impact of the adoption of IFRS 16 on this summary financial information is described below.

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

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

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

Impact of the new definition of a lease

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

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

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

Impact on lessee accounting

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. Payments under operating leases were recognised in the Group's consolidated statement of comprehensive income on a straight-line basis over the term of the lease.

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial impact of initial application of IFRS 16

The only impact on the Group relates to leases for use of office premises at various locations. These were earlier classified as operating leases under IAS 17, with lease rentals charged to operating expenses on a straight-line basis over the lease term. As required by IFRS 16, as a lessee, the Group has recognised a lease liability representing the present value of the obligation to make lease payments, and a related right-of-use asset.

In calculating the present value of the obligation to make lease payments, the Group's incremental borrowing rate has been used as the discount rate, as the rates implicit in the leases are not evident. The incremental rate referred to by IFRS 16 indicates the rate of interest that a lessee would have to pay to borrow over a similar term, with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. The weighted average lessee's incremental borrowing rate applied to lease liabilities recognised in the consolidated balance sheet on 1 April 2019 is 3.25%.

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

The Group has recognised £737,000 of right-of-use assets and £737,000 of lease liabilities upon transition to IFRS 16 with effect from 1 April 2019. As at 31 March 2020, the Group had no lease liabilities in respect of leases committed to but not yet commenced.

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.

The Directors have made the following judgements and estimates, which have had the most significant effect on the carrying amounts of the assets and liabilities in this summary financial information.

Fair value measurements and valuation processes

The judgements required to determine the appropriate valuation methodology of unquoted equity investments means there is risk of a material adjustment to the carrying amounts of assets and liabilities. These judgements include a decision whether or not to impair or uplift investment valuations.

The fair value of unlisted securities is established using the International Private Equity and Venture Capital Valuation Guidelines ("IPEVCVG"), as revised on 21 December 2018 and effective for accounting periods beginning after 1 January 2019.

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

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

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

0-6 months post last funding round

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

7-18 months post last funding round

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

19+ months post last funding round

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

A key focus of the portfolio valuations as at 31 March 2020 was an assessment of the potential impact of the COVID-19 pandemic on each investee company's enterprise value, considering the performance before the outbreak of COVID-19, as well as the projected short-term impact on the ability to generate earnings and cash flows, and also the longer-term view of each investee company's ability to recover.

The Group has applied a COVID-19 overlay (assessing some 13 criteria) to help ascertain the potential effects on each of the investee companies' enterprise values. The overall reductions in prices of listed entities was used as a basis to determine a range of COVID-19 discounts between 25% and 100%. The methodology for determining the valuation of investments has been predominantly based on taking the enterprise value from the last funding round and then applying a COVID-19 discount where applicable. This assessment is based on Mercia's knowledge of the investee companies and of the specific effects seen as relevant to each sector within which the investee companies operate. The Group then looked closer at each investee company to assess any mitigating factors (eg Mercia's defensive investment structuring), comparable asset or sector performance to arrive at our valuation.

The uncertainty surrounding the ultimate impact of the COVID-19 pandemic has resulted in significant judgement in respect of the future cash flows and hence enterprise values for some of the Group's direct investments. This includes estimation in relation to liquidity and delays to debtor payments; forecast revenue, supply chain, employee and slower growth effects; and the offsetting impact of the Government's and the Bank of England's mitigation measures. The discounts applied to those direct investments which have had fair value decreases in the period reflect increased uncertainty around the duration of stay-at-home and social distancing policies, the speed of recovery from those policies, future inflation, power and oil prices, as well as company-specific factors. These uncertainties have also been reflected in the volatility seen in public markets since March 2020. The direct investment portfolio is diversified by sector and underlying risk exposures. Consideration was also given to the impact of stay-at-home and social distancing policies on the customers of the Group's investee companies, including on their viability and access to liquidity. Almost all of the Group's investee companies have continued to operate since the start of the COVID-19 pandemic.

As described above, the macroeconomic uncertainty has created uncertainty in the fair value of the direct investment portfolio. The Directors have assessed the estimates made in relation to each individual valuation and do not believe that a reasonable possible change in estimate would result in a material change in the value of each investment.

Accounting for the acquisition of the VCT fund management business of NVM Private Equity LLP

On 23 December 2019 Mercia completed the acquisition of the venture capital trust ("VCT") fund management business of NVM Private Equity LLP ("NVM"), which comprised the acquisition of three fund management contracts ('the Northern VCT contracts') and the transfer of NVM's VCT investment team. Further details are included in note 9 to this summary financial information. The fund management contracts acquired in the transaction have been fair valued at acquisition with reference to the forecast cash revenues from each contract, less the forecast costs associated with servicing those contracts, over an expected useful life of 10 years for each of the three fund management contracts, discounted at the rate of 15%. The discount applied is reflective, inter alia, of the risk profile of the contracts acquired and is considered a significant assumption. Should the discount rate be increased by 1%, the value of the fund management contracts would reduce by £800,000 with goodwill increasing by a corresponding amount. The expected useful life is considered a significant assumption. Should it be increased by one year, the value of the fund management contracts would increase by £1,300,000 with goodwill decreasing by a corresponding amount. Should the cash revenues from each contract less the costs associated with servicing those contracts increase by 1%, the value of the fund management contracts would increase by £200,000 with goodwill decreasing by a corresponding amount.

Goodwill has been recognised as the difference between the fair value of consideration paid and the fair value of the fund management contracts acquired. Further details are included in note 10 to this summary financial information.

Valuation of deferred consideration

The fair value of the deferred consideration payable to NVM in respect of the acquisition of its VCT fund management business, contingent upon certain conditions being met, has been estimated with reference to the contractual obligations as at 31 March 2020. The conditions upon which payment of the deferred consideration is contingent are outlined below.

The first condition is that no termination notice is served by any of the three Northern VCT boards before the first, second and third anniversaries of completion. There are no indications to date that notice will be given, so this has been assumed to be true and the value payable discounted by 10%. The second condition is that the Group receives at least £16,000,000 of fees in respect of the VCT fund management contracts during the three years post completion.

The third condition is that, during the same three-year period, the Northern VCTs collectively raise at least £60,000,000 in new capital. The fair value of the deferred consideration in respect of these two conditions has been based on a weighted probability of outcomes over the three-year period and discounted by 10%.

The discount applied is reflective of the risk profile of the conditions being met and is considered a significant assumption. Should the discount rate be increased by 1%, the value of the deferred consideration would reduce by £200,000 with goodwill decreasing by a corresponding amount.

5. Segmental reporting

For the year ended 31 March 2020, the Group's revenue and loss 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 proactive specialist asset management, because the results of the Group are monitored on a Group-wide basis. The Board of Directors assesses the performance of the operating segment using financial information which is measured and presented in a consistent manner.

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

6. Fair value movements in investments

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

7. Operating loss

Operating loss is stated after charging:

8. Loss per share

Basic loss per share is calculated by dividing the loss for the financial year by the weighted average number of Ordinary shares in issue during the year. Diluted loss per share is calculated by dividing the loss for the financial year 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 year. The loss and weighted average number of shares used in the calculations are set out below:

The calculation of basic and diluted loss per share is based on the following data:

9. Business combinations

The Group consists of Mercia Asset Management PLC and its subsidiary undertakings.

On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP ("NVM") for a total maximum consideration of £25,000,000 comprising a combination of cash and new Ordinary Mercia shares.

The fair value of the identifiable net assets acquired and the consideration payable under IFRS 3 are as follows:

Under the terms of the acquisition agreement, the fair value of the consideration payable to NVM is:

The initial consideration shares were admitted to trading on AIM on 27 December 2019.

Actual revenues and profits of the VCT fund management business

The actual revenues and profits that have been generated since the acquisition of the VCT fund management business on 23 December 2019 to 31 March 2020 are:

The disclosure of the revenue and loss for the Group if the acquisition had occurred on 1 April 2019 has not been presented as the determination of these amounts is impracticable, due to the fact that the entire NVM Private Equity LLP business was not acquired and there will have been revenues and expenses not relevant to the VCT fund management business acquired.

Fair value

The fair value of the fund management contracts has been estimated using a discounted cash flow model. The estimated cash flows have been valued at a discount of 15%, resulting in the recognition of a fair value for the fund management contracts of £20,331,000.

10. Goodwill

The goodwill arising on the businesses acquired to date, being Mercia Fund Management Limited, Enterprise Ventures Group Limited ('Enterprise Ventures') and the VCT fund management business of NVM, is set out in the table below.

Included in additions to goodwill in the financial year is £6,314,000 which arose on the acquisition of the VCT fund management business in December 2019. Details of the consideration paid and assets acquired as part of this acquisition are set out in note 9 to this summary financial information.

Recoverable amounts for each cash generating unit ("CGU") are based on the higher of value in use and fair value less costs of disposal ("FVLCD"). FVLCD for each CGU to which goodwill has been allocated was calculated using a revenue multiple model based on the CGU's budgeted revenues for the financial year ending 31 March 2021. The review concluded that the FVLCD recoverable amount of each CGU exceeds its carrying value. The Directors do not consider that any reasonable possible changes to the key assumptions would reduce the recoverable amount.

11. Intangible assets

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

12. Investments

The net change in the value of investments for the year is a decrease of £188,000 (2019: £21,589,000 increase).

The table below sets out the movement in the balance sheet value of investments from the start to the end of the year, showing investments made, investee company loans repaid and the direct investment fair value movements.

In accordance with the Group's accounting policy in respect of direct investments, investments that are held as part of the Group's direct investment portfolio are carried in the balance sheet at fair value even though the Group may have influence over those companies. This treatment is permitted by IAS 28, 'Investments in Associates'.

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

Included within cash and cash equivalents is £467,000 (2019: £629,000) of cash held on behalf of third-party EIS investors which is not available for use by the Group.

14. Deferred consideration

On 23 December 2019 Mercia completed the acquisition of the VCT fund management business of NVM Private Equity LLP for a total maximum consideration of £25,000,000 comprising a combination of cash and new Ordinary Mercia shares. The initial consideration was £16,600,000, with deferred consideration of up to £8,400,000 also being payable, contingent upon certain conditions being met.

The deferred consideration comprises £6,300,000 in cash, payable in three equal instalments on the first, second and third anniversaries of completion, provided that no termination notice has been served by any of the Northern VCTs before each respective anniversary payment date, and £2,100,000 payable in new Ordinary Mercia shares. There are no indications to date that notice will be given and so the fair value payable has been recognised, discounted back to the acquisition date at a rate of 10%.

50% of the deferred consideration shares will be payable if the Group has received at least £16,000,000 of fees in respect of the Northern VCT fund management contracts in the three years post completion. The remaining 50% of the deferred consideration shares will be allotted and issued if, during the same three-year period, the Northern VCTs collectively raise at least £60,000,000 in new capital. If either or both of these conditions are met the number of new Ordinary shares to be issued to satisfy the deferred share consideration will be calculated based on the average of the daily closing mid-market price for an Ordinary Mercia share, for each of the five days immediately preceding the date of issue. The fair value of this element of the deferred consideration has been based on a weighted probability of outcomes over the three-year period and discounted by 10%.

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 of NVM Private Equity LLP. This has been recognised at 19% of the fair value of the fund management contracts at acquisition and is reassessed at each year end, with the movement being recognised in the consolidated statement of comprehensive income.

As at 31 March 2020 a deferred tax liability of £3,812,000 (2019: £109,000) has been recognised. Of this total, £3,758,000 is in respect of the intangible asset arising on the acquisition of the VCT fund management business of NVM Private Equity LLP and £54,000 is in respect of the remaining intangible asset arising on the acquisition of Enterprise Ventures.

16. Issued share capital

On 20 December 2019 120,000,000 new Ordinary shares of £0.00001 each were issued at a price of 25.0 pence per share via a placing which raised £30,000,000 (before share issue costs). These new shares were admitted to trading on AIM on 23 December 2019.

On 23 December 2019 16,800,000 new Ordinary shares of £0.00001 each were issued at a price of 25.0 pence per share as part of the initial consideration for the acquisition of the VCT fund management business. These new shares were admitted to trading on AIM on 27 December 2019.

Each Ordinary share is entitled to one vote and has equal rights as to dividends. The Ordinary shares are not redeemable.

17. Share premium

The premium on the issue of Ordinary shares in the year arises from the placing of 120,000,000 new Ordinary shares of £0.00001 each at a price of 25.0 pence on 20 December 2019 and 16,800,000 new Ordinary shares of £0.00001 each issued at a price of 25.0 pence on 23 December 2019 as part of the initial consideration for the acquisition of the VCT fund management business of NVM Private Equity LLP.

18. 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 balance sheet. 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 fair value hierarchy used is outlined in more detail in note 4 to this summary financial information.

The following table gives information about how the fair values of these financial assets and financial liabilities are determined and presents the Group's assets that are measured at fair value as at 31 March 2020.

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 31 March 2020, the Group had one direct investment listed on AIM (Concepta); this has been classified in Level 1 and valued at its bid price as at 31 March 2020.

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 in the fair value hierarchy and the individual valuations for each of the companies have been arrived at using appropriate valuation techniques.

Up until 31 March 2019, the Group classified investments included in Level 3 under four valuation techniques, being 'price of recent funding round', 'cost', 'enterprise value' and 'price of recent funding round or cost adjusted for impairment'. From 1 April 2019, the Group has adopted the revised International Private Equity and Venture Capital Valuation Guidelines in 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 4 to this summary financial information provides further information on the Group's valuation methodology, including a detailed explanation of the valuation techniques used for Level 3 financial instruments.

19. Availability of Annual Report

The Annual Report of Mercia Asset Management PLC will be posted to all shareholders on 31 July 2020. An electronic copy will also be available on Mercia Asset Management PLC's website at www.mercia.co.uk. 

20. Annual General Meeting

The Annual General Meeting of Mercia Asset Management PLC will be held at Forward House, 17 High Street, Henley-in-Arden, Warwickshire B95 5AA on 24 September 2020 at 10.00 a.m.

Coronavirus ("COVID-19") Annual General Meeting implications

The Company is closely monitoring developments relating to COVID-19. The UK Government has introduced measures and recommendations to prevent the spread of COVID-19, including restrictions on events with large numbers of attendees. These measures and recommendations could change, including additional measures being introduced in the future.

The Company's current intention is to proceed with the Annual General Meeting at the time, date and place set out in this notice. The Company will continue to monitor UK Government and NHS advice and members will be notified in the event that the Company is required to change its plans. In order that members can exercise their rights whether or not they are able to attend the Annual General Meeting in person, and as it is important that members cast their votes at the Annual General Meeting, the Company strongly encourages all members to appoint a proxy for all votes.