Mercia Asset Management PLC

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

Preliminary results for the year ended 31 March 2022

Robust results with growth in net assets per share and increased final dividend

Mercia Asset Management PLC (AIM: MERC), the proactive, regionally focused specialist asset manager with c.£959million of assets under management ("AuM") is pleased to announce its preliminary results for the year ended 31 March 2022.

Highlights

·    Adjusted operating profit up c.152% to £8.4million (2021: £3.3million)

·    Realised gains and finance income totalling £12.2million generated from the sale of Faradion

·    £11.4m fair value movement in direct investments, including fair value uplift of £6.7million in nDreams following significant third-party investment

·    Profit before taxation of £27.4million (2021: £34.0million)

·    Proposed final dividend up c.67% to 0.5 pence per share (2021: 0.3 pence per share)

·    Net assets of £200.6million (2021: 176.0million)

·    Net Assets per share up c.14% to 45.6 pence (2021: 40.0 pence)

·    Cash and short-term liquidity investments of £61.3million (2021: £54.7million)

Financial results

1    The proposed final dividend is subject to shareholder approval at the Company's Annual General Meeting on 13 September 2022, and if approved, will be paid on 11 October 2022.

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

3    Including the Group's consolidated net assets.

Managed fund developments

·    Third-party funds under management ("FuM") of c.£758million (2021: c.£764million) contributed £19.5million in revenue, excluding performance fees, for the year (2021: £18.2million)

·    Cash returned to fund investors from successful realisations of c.£87million (2021: c.£27million)

·    Venture FuM c.£592million (2021: c.£600million)

o  £15.7million successfully raised across three Enterprise Investment Scheme ("EIS") funds during the year

o  c.£15million additional allocation from British Business Bank under the Northern Powerhouse Investment Fund Equity mandate, with effect from 1 November 2021

o  Interim and final dividends totalling £17.0million paid by the three Northern Venture Capital Trusts ("VCTs"), in addition to special dividends paid of £20.8million arising from successful realisations

·    Private equity FuM c.£48million (2021: c.£54million)

o  Portfolio trading and prospects improving post pandemic

·    Debt FuM c.£118million (2021: c.£110million)

o  Accreditation awarded to the Group to deliver debt funding under the Recovery Loan Scheme ("RLS")

o  c.£11million additional allocation from British Business Bank under the Northern Powerhouse Investment Fund Debt mandate, with effect from 1 November 2021

Direct investment portfolio developments

·    Direct investment portfolio fair value of £119.6million (2021: £96.2million), up c.24% notwithstanding the significant investment realisation of Faradion, completed in the year

·    Sale of Faradion in January 2022 resulted in total cash receipts of £19.4million (including a £1.5million loan repayment), generating £9.9million of realised gains together with crystallised loan interest and redemption premiums totalling £2.3million for the year

·    £18.4million net invested into 16 portfolio companies (2021: £15.4million net invested into 19 portfolio companies), including new direct investments into Forensic Analytics Limited and Pimberly Limited

·    Completion of a significant third-party investment into nDreams, resulting in a £6.7million fair value increase to the Group's investment holding value as at 31 March 2022

Post year end developments

·    In April 2022 the Group's AuM surpassed £1.0billion, with the three Northern Venture Capital Trusts raising £40.0million through the allotment of new shares, plus Mercia's maiden Knowledge-intensive Impact EIS Fund raising £4.5million. Both successes reflect continued confidence in the track records of the VCT and EIS portfolios and the investment teams who manage them

·    Demerger from Intechnica of its cybersecurity bot-management business Netacea, to allow both companies to benefit from a refined focus on capitalising on their respective significant growth opportunities. Mercia retains stakes in both businesses post demerger equal in value to its previous holding value

·    Exciting commercial progress continues to be made by the direct investment portfolio

·    Mercia has been accredited as a carbon neutral organisation, demonstrating its commitment to ESG principles

Mark Payton, Chief Executive Officer of Mercia, commented:

"I am pleased to share a set of results that showcase the strength and maturity of Mercia and its business model. The significant success that we have seen during the last two financial years, and our positive future prospects, have been made possible by the combined efforts of everyone connected with Mercia. I would therefore like to express my sincere gratitude to the amazing portfolio companies that we have the privilege to support. As a Group, we are also very appreciative of the growing belief in Mercia from our third-party fund investors, and both VCT and Mercia shareholders, that the UK regions can deliver value and returns.  Finally, I would like to thank Mercia's employees, without whom we would not have become who we are today: #OneMercia."

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

-Ends-

For further information, please contact:

Analyst briefing

An analyst webcast will be given by Dr Mark Payton, Chief Executive Officer, Martin Glanfield, Chief Financial Officer, and Julian Viggars, Chief Investment Officer, at 9.30am today, 5 July 2022. Analysts wishing to register are asked to contact mercia@fticonsulting.com. An audio webcast of this briefing will subsequently be available later in the day via Mercia's website.

Investor presentation

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

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

About Mercia Asset Management PLC

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

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

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

Non-Executive Chair's statement

#OneMercia

The last two years have been a period of immense challenge for everyone. Navigating our way through the pandemic, whilst continuing to grow Mercia and execute on our strategic priorities, has required a cohesive Board, experienced and resilient Executive leadership and unwavering commitment from all of our valued staff. Right across the Group, our people continue to define us. Our #OneMercia culture is the glue which binds together all of our collective and individual aspirations. Equally important is the encouraging support we continue to receive from our shareholders and fund investors across all of our asset categories. Our ever-growing portfolio of investee companies and their leadership teams are also critical to our continuing future success. On behalf of our Board, I pay tribute and thank all connected with Mercia for their outstanding collective efforts during the last two years, helping us to reach this very strong juncture of over £200million in net assets, whilst still relatively young in our journey.

Responsible investing with purpose

Mercia does not apply a scatter-gun approach to investing. We invest with purpose to make a return for our investors. As we deploy our investment skills, our mindset is that of a responsible investor, as we share the investee's journey with them. This mindset is not just outward looking however, we also look at ourselves to see how we can increase our own contribution to the fundamentally important areas of diversity and the environment.

There is always more that can be done, but it was encouraging to see that at our recent senior leadership strategy day, half of the 14 attendees were women. Equally encouraging is that despite it not yet being mandatory for Mercia, we have taken the proactive decision to measure and report on our carbon footprint - for the first time Mercia has been measured and offset its carbon footprint to become a carbon neutral company. As part of our mantra of 'responsible investing with purpose', we believe in practicing what we ask of our investee companies, in terms of both good governance and being good citizens. Carbon offsetting is just the beginning, and we will seek to reduce our carbon footprint over time.

Strategic progress - 'Mercia 20:20'

In 2021, Mercia largely achieved its previous three-year strategic plan one year early. At the time of announcing last year's financial results, the Group launched a new three-year strategic plan: 'Mercia 20:20': The Group's new objectives are to:

•       deliver average pre-tax profits of £20million per annum over the next three years; and

•       grow its AuM by an average of 20% per annum over the same three-year period.

The achievement of these two new strategic objectives will deliver substantial total shareholder returns during the three years, as well as facilitating a growing dividend. In the specialist asset management sector in which Mercia operates, year-on-year financial results are rarely uniform. The Group's focus is therefore on delivering these twin annual strategic objectives 'on average' during the three-year period. The Board is pleased with progress thus far and is currently on target to deliver against these objectives.

Dividend

In conjunction with the announcement of its interim results in December 2020, Mercia declared its maiden interim dividend of 0.1 pence per share, as the beginning of a progressive dividend policy. In October 2021, this was followed by a maiden final dividend of 0.3 pence per share and an interim dividend last December of 0.3 pence per share. If approved by shareholders at this September's Annual General Meeting, the Board is recommending a final dividend of 0.5 pence per share, making 0.8 pence per share for the full year (2021: 0.4 pence per share). If approved, the dividend will be paid on 11 October 2022 to shareholders on the register at close of business on 23 September 2022.

Given the strength of Mercia's business model and its excellent cash position, the Board's objective remains to maintain this progressive policy.

Governance and engagement

As part of our continuing commitment to the governance principles of the Quoted Companies Alliance corporate governance code, we commissioned our third independent external Board effectiveness review since our admission to AIM in December 2014. It is reassuring to note that the external review concluded that "overall, the Board appears to be performing very well" and that "the Board has clearly made progress since its last effectiveness review".

It is critical to our future success that we continue to meet the investment objectives agreed with our different asset class fund investors. This includes our institutional investors, individual investors and the independent boards of the three Northern VCTs. In respect of the latter, we remain fully committed to investing in and supporting the VCT investment team, as we help them to successfully manage and expand their VCT portfolios.

Proactive engagement with all of our stakeholder groups remains particularly important to our Board. Whilst the intermittent lockdowns and remote working directives of the last two years have curtailed face-to-face discussions, I look forward to re-engaging with our stakeholders during the current financial year.

Opportunity

These financial results successfully build on last year's breakthrough achievements. They also point to the calibre of our people and the accelerating maturity of our business model. This is demonstrated by the recurring profits now being derived from our investment activities in both our fund management business and from the balance sheet portfolio. With continuing heightened interest in several of the sectors into which Mercia invests, the opportunities for further growth, and hence the potential for sustained incremental shareholder value creation, is now firmly established.

As Chair, I remain immensely proud to be part of #OneMercia, which remains a community of outstanding people who care about responsibly investing the funds we manage, the companies in which we invest or to which we lend, and, most importantly of all, continue to care about each other.

Ian R. Metcalfe
Non-executive Chair

Chief Executive Officer's Review

Mercia's sole focus is to fulfill the ambitions of our investors, investees and employees and, in this respect, we are particularly focused on where our investees and employees are heading, not where they are from. This aligned drive has helped Mercia perform strongly during the repeated challenges of the last two years; be it the impact of Brexit, the pandemic, rising inflationary pressures or the war in Ukraine. I am proud of the resilience that the business has demonstrated, what we have achieved during this prolonged period of uncertainty and the prospects that will result in a rewarding future for all our stakeholders. As a purpose-led domestic investor with offices in the UK's regions, we believe passionately in responsible investment as we seek to set the standards that our portfolio companies will emulate. Our immediate goals have been driven by a strong ESG agenda and have already delivered improved diversity and inclusion within our business. I have no doubt that the momentum achieved will instill a confidence in our future intent and the Mercia team that drives these important initiatives.

Investing in local communities

We are exclusively focused on the UK market, investing in small and medium-sized enterprises ("SMEs"), typically located within two hours of one of our eight physical offices. A demonstration of our continued growth is reflected in the recent opening of our Bristol office. Mercia's investment reach is nationwide; across the South West, South East, the Midlands, the North of England and into Scotland and Wales, providing a genuine regional presence within a national footprint. The companies in which we invest create jobs and embed themselves into the local economies as they grow.

Ambitious for our investors

Coupled with the increasing quality of our portfolio is our 'Complete Connected Capital', the growing pools of different types of capital that will help take a business from its inception, through scale up and on to profitability. We make sure that the right capital is available at the right time for our portfolio businesses, whilst ensuring that regular reporting, externally audited portfolio holding values, regular face-to-face and digital access to Mercia keep our investors fully informed of their investment progress. This has been a successful period for Mercia's investors with c. £87million returned to individual and institutional investors as a result of investment realisations. Due to the nature of Mercia's long-term third-party capital, which is held in 'closed-end' funds, we do not have exposure to redemptions. The relatively small increase in assets under management is a consequence of these successful exits, leading to elevated cash returns to investors. However, our strong investment performance has been noted by EIS and VCT market analysts in particular, which should help drive future AuM growth, as investors look to re-invest and/or follow our successful track record of investment returns. We are one of the leading managers of EIS funds and VCTs in the country, and whilst we are not complacent in respect of the success experienced this year, our growing exit track record and investment returns bode well for future AuM growth.

Ambitious for our investees

With an active network nationwide, we receive over 2,500 business plans per annum. Of those received, we typically invest in c.5%. As a committed investor however, we seek to respond to all approaches for investment within two working days, and for those 95% not ready for our investment today, we endeavour to support them to find alternative funding sources where possible. For those that do join our growing portfolios, we will typically take a position on the board of our equity investments and work with each management team to help them fulfil their growth ambitions. Within our Group we have established 'Mercia Nucleus' to support our investees and help accelerate their growth - this is a consolidated function with the expertise and connections to facilitate business development, leadership training, networking and access to an extensive talent pool of executives and NEDs. Our nationwide infrastructure of offices and meeting facilities, extensive Partnership Programme and access to our in-house legal expertise on investment transactions and exits, together provide the synergies that engender speed and consistency of growth.

Ambitious for our employees

"Culture eats strategy for breakfast" and in the current post-pandemic environment, there has never been a better truism; but culture does not stand proud of ambition, and making a real and equitable impact in the communities that we serve, is fuelled by our strong desire to achieve success. Mercia's performance and building momentum is testament to the whole #OneMercia team that we have been able to attract to the Group since our 2014 Initial Public Offering, with an increasing number moving up through our business from within. Mercia has now reached critical mass and is thus able to ensure that continuous development and career progression is offered, where possible, to each team member, to empower their collaborative nature and sustain their personal ambition within Mercia. We will not stand still, as we constantly look to improve how we can support, develop and motivate our staff; Mercia will only ever be as good as the talent we attract, develop and retain.

Growing net asset value ("NAV") per share

Our hybrid investment model of supporting exciting SMEs, first through our managed funds, before selectively co-investing with scale-up funding from our proprietary capital, is now consistently contributing to our growing NAV per share. The recent full cash exit from Faradion, which followed less than 12 months after the successful OXGENE™ full cash exit, demonstrates a number of key points. We are typically exiting at prices significantly above our holding values - OXGENE at c.£18million above holding value in the previous financial year, and Faradion at c.£14million above the opening holding value in this financial year. These two exits alone generated c.£50million in cash back to our balance sheet, meaning that we are unlikely to come back to our shareholders to ask them for more money to fund the Group's direct investment activities. Being largely comprised of unquoted investments which are not susceptible to stock market volatility, as is currently occurring, we remain confident that our maturing direct investment portfolio will continue to play an important role in increasing NAV per share in the years to come.

Growing adjusted operating profit

Our commitment to Mercia's recently established progressive dividend policy, is underpinned by Mercia's profitable and cash-generative fund management operations, which also enable us to continue to invest in internal system efficiencies and our talented staff. The long-dated nature of our managed funds enables us to have confidence in the sustainability of this dividend policy.

Combined, our direct investment success and our profitable fund management activities are positively contributing to our growing total shareholder return; our annual NAV per share increase plus our dividend yield.

Mercia's 20:20 three-year plan; one year in

From 1 April 2021, we set a new strategic target that, on average, over the next three years we will seek to generate £20million of profit before tax ("PBT") per annum and 20% growth in AuM per annum. Accepting the likely uneven spread of this on a per annum basis, we remain confident in achieving both objectives at the end of this three-year period. As these results show, one year in we have exceeded the average annual PBT target, achieving c.£27million profit before tax. Although Mercia's assets under management are not open-ended, we have experienced higher than anticipated distributions to investors, ironically as a result of our excellent exit investment performance. Therefore, notwithstanding our overall positive portfolio companies' progress and the additional funds which have been raised and/or awarded to us by existing investors, the net effect is a small increase in AuM for the year as a whole, although shortly post year-end we raised c.£45million in new VCT and EIS capital to invest, taking our AuM to over £1billion for the first time.

A positive outlook in uncertain times

We all face an uncertain global outlook as the economic system absorbs inflation levels not seen for 30 years, climbing interest rates and the on-going war in Ukraine. The world continues to retrench from globalisation toward a more nationalist economic agenda. For Mercia, we continue to have a positive outlook despite the macro challenges. Our purpose-led UK only agenda of responsible investment across the regions, coupled with maturing equity portfolios across our asset classes in sectors less likely to be adversely impacted by Brexit, supply chain issues and sanctions, together with our increasing investment performance, place us in a positive position as we look to further scale our AuM and, with it, continue to grow total shareholder return.

Our significant success that we have seen during the last two financial years, and our positive future prospects, have been made possible by the combined efforts of everyone connected with Mercia. I would therefore like to express my sincere gratitude to the amazing portfolio companies that we have the privilege to support. As a Group, we are also very appreciative of the growing belief in Mercia from our third-party fund investors, and both VCT and Mercia shareholders, that the UK regions can deliver value and returns.  Finally, I would like to thank Mercia's employees, without whom we would not have become who we are today: #OneMercia.

Dr Mark Payton
Chief Executive Officer

Chief Investment Officer's review

An excellent year for realisations for both Mercia's managed funds and direct investment portfolio

It is always interesting to re-read my previous CIO reports when starting to pull together the current one. Last year I did so with a sense of optimism for the year ahead and, without doubt, that positivity was well placed.

Over the last financial year, across the Group's equity components, we have realised £155million from 30 companies, delivering an average return of 3.1x. This is an excellent performance, and when taken together with Mercia's 2021 results, we have realised over £250million of cash on behalf of individual and Limited Partner investors alongside our own balance sheet. This in turn has had positive effects on the NAV of both Mercia Asset Management PLC and our VCTs, as well as profits from performance fees resulting from a number of these investment performance successes.

Direct investments: portfolio-wide progress, breakout at nDreams

The table below lists Mercia's top 20 investments by fair value as at 31 March 2022, including the net cash invested, realisation proceeds, realised gains, fair value movements and the fully diluted equity percentage held.

    *       Trading as Intelligent Positioning

     **       Trading as Avid Games

    ***    Formerly Soccer Manager Limited, prior to a change in registered name to Invincibles Studio Limited in March 2022

    ****   Formerly MIP Diagnostics Limited, prior to a change in registered name to MIP Discovery Limited in May 2022

Direct Investment activity - positive progress across several key direct assets and a growing pipeline of potential new direct assets emerging from our managed funds

Our proprietary capital has three discrete functions; selective direct investment mainly into existing managed fund portfolio companies, as a minority limited partner in seeding strategically relevant managed funds, and to fund acquisitions which will accelerate the Group's growth objectives and enhance shareholder value.

One year into the Group's three year 'Mercia 20:20' strategic plan, the direct investment portfolio is developing increasingly well, and we are optimistic of more to come. We typically look to build direct holding stakes of between 10 and 30%, and this, combined with our managed fund positions, gives Mercia a degree of influence over the development of these young companies.

As at 31 March 2022, the value of the Group's direct investment portfolio was £119.6million (2021: £96.2million). This reflects an upward fair value movement of £11.4million (2021: £10.1million) and net cash invested of £18.4million (2021: £15.4million), less the realisation of Faradion Ltd, which accounted for £5.7million of the total opening portfolio fair value.

Faradion was sold in January 2022 to India's Reliance New Energy Solar Ltd, a wholly owned subsidiary of India-based Reliance Industries Ltd, for £100.0million. Total cash proceeds back to Mercia's balance sheet of £19.4million resulted in a realised gain of £9.9million, generating a 4.4x return on Mercia's direct investment cost of £4.4million and a c.72% internal rate of return ("IRR") since the first direct investment in 2017.

The sale has also generated combined cash returns of c.£32million on a total investment cost of £3.6million for Mercia's managed funds, delivering fund IRRs of between c.30% and c.72%. Mercia has proactively supported Faradion throughout its development, including representation from Mercia's Investment Director, Ashwin Kumaraswamy, as a non-executive director on Faradion's board from inception through to exit.

We continued to support our foremost direct portfolio businesses with £11.1million of the £18.4million total being invested across our top 10 direct investment assets.

We made two new direct investments during the year. In October 2021, we completed a £1.8million direct investment into Forensic Analytics Ltd, alongside a £2.7million investment by our Northern VCTs. In November 2021, Mercia's third-party managed fund portfolio company, Pimberly Ltd, completed a £4.3million funding round to expand into the US market and accelerate its growth in the UK. Mercia invested £1.4million of capital from its own balance sheet, alongside a further £2.9million investment by the Northern VCTs. Both new assets are performing well. Within our shadow portfolio of existing fund assets being tracked are Axis Spine Technologies Ltd, Nova Pangaea Technologies (UK) Ltd and Uniphy Ltd, a business developing smart surface technology aimed at the human/machine interface. We expect a number of exciting new additions to the direct portfolio in the current year.

For the year as a whole, we recorded fair value uplifts in 10 of our direct investments, the largest being £6.7million for nDreams Ltd. The virtual reality market has grown significantly against a backdrop of greater hardware penetration at affordable prices and renewed investment impetus by Oculus, Sony and others. nDreams completed a number of important steps in its development with new game releases and its push into third-party publishing. In March 2022, the company secured £20.0million of new investment from European games investor Aonic AB. We look forward to working with our new investment partner in the next phase of nDreams' growth as the company develops further intellectual property. Its newest VR title, which is based on the Ghostbusters intellectual property in conjunction with Sony Pictures Virtual Reality, was introduced by Mark Zuckerberg in April 2022 at the Meta Quest Gaming Showcase.

Other operational highlights within this sector include Invincibles Studio Ltd (formerly Soccer Manager Ltd), growing revenues 40 per cent year-on-year and VirtTrade Ltd t/a Avid Games, with more than threefold revenue growth over the course of the year. The revenue growth of both businesses has been achieved off the back of new game releases and the increasing awareness of their games worldwide.

Intechnica Group Ltd ("Intechnica") saw strong progress with a fair value uplift of £2.9million. After raising £8.5million from new and existing investors in December 2021, Intechnica recently completed the demerger of its exciting bot management cyber security business, Netacea. Mercia now holds stakes in both growing businesses, equal in value to its pre-demerger holding value.

We are continuing to see our core companies grow their revenues and progress their business models, in many cases underpinned by positive market sentiment and longer-term trends. We have seen accelerating commercial interaction and developments across our Deep Tech and Manufacturing assets, in particular Warwick Acoustics Ltd, which is engaged in discussions with a wide variety of automotive original equipment manufacturers and has successfully demonstrated its electrostatic acoustic panel technology within a premium marque vehicle for a globally recognised car brand.  The technology was positively profiled by Autocar magazine earlier this year with the listening experience described as "astounding".

Impression Technologies Ltd has made advances, with licence partners making their first sales, and we are particularly excited about the company's new developments in battery boxes for electric vehicles and the use of recycled aluminium in the company's HFQ® pressing process.

Our Life Sciences portfolio also had a strong year. Locate Bio Ltd continues to progress well with its pre-clinical trials and, following our syndicated investment in February 2022, MIP Discovery Ltd, is well funded to deliver its technical and commercial milestones.

Whilst much of the progress seen is due to a maturation of these businesses in their markets, we have also worked hard to add new complementary skills into these companies, including high-profile chairs being added to the boards of nDreams, Netacea and Impression Technologies, plus senior appointments at Intelligent Positioning and MIP Discovery.

Mercia Nucleus - the evolution of value-add services across the portfolios

We have expanded Mercia's value-add offering to our portfolio companies through the addition of other services that include talent search, growth partner counsel, non-executive appointments and knowledge sharing. This area of our business is something we have continued to invest in to increase the value added to our portfolio companies through hands-on support and development. Adding value is at the heart of what we do and as such we have formalised these performance drivers into what we call Mercia Nucleus.

Our Mercia Nucleus team has been busy throughout the year with 41 appointments made into portfolio companies.

Alongside this we continue to forge new co-investor relationships with BGF, Aonic AB, Vitruvian and Aramco Ventures becoming new partners across our direct and fund assets.

We use different performance measures across our suite of asset classes. For our direct portfolio, IRR is adopted as our proprietary capital is also used for other activities. As at 31 March 2022, the direct portfolio IRR had increased to 16%, largely following the successful sale of Faradion.

We measure Total Value to Paid In ("TVPI") across our Regional and PE funds as it shows total value returned and accruing to investors after fees; this naturally increases over time as more capital is returned and the portfolio values grow. Our legacy Venture funds, at a TVPI of 193%, are significantly up year on year as a number of assets were sold at higher values during FY22. Our newest PE fund saw a recovery in asset values as the impact of the pandemic on its portfolio businesses began to recede.

For our VCTs, Total Return, which includes cumulative dividends paid alongside current asset value to give a true total performance measure, has been principally flat year on year due to share price weakness across the listed part of the VCT portfolios in the final quarter of the financial year.

Our strong overall investment performance enables us to raise additional funds, and we were allocated a further £31.4million this financial year from additional contributions to the Northern Powerhouse Investment Fund ("NPIF") Equity and Debt funds and our Midlands Engine Investment Fund ("MEIF") Proof of Concept and Early Stage Fund by British Business Bank. Alongside this, our EIS team raised new funds totalling c.£16million, in addition to Northern VCT investors re-investing c.£6million of dividends paid during the year. Since year end, £40.0million of new funds were raised by our Northern VCTs, together with c.£5million raised by our first Knowledge-intensive Impact EIS Fund. At the year end, we had c.£297million of liquidity across all our funds and balance sheet.

Sourcing deals from all regions of the UK

At Mercia we have 74 investment professionals spread across the regions, and have further scaled our reach by opening a new office in Bristol to strengthen our presence and growth in the South West of England, along the M4 corridor and into Wales. Fund Principal Julian Dennard is building his team and has already sourced deals in Cardiff, Exeter and Bristol. We have also expanded our teams in Manchester and London, and continue to provide nationwide coverage, completing new investments from North Shields to Shoreditch, from a wide variety of sources.

Our managed funds as at 31 March 2022 totalled c.£758million. During the year, we invested £105.7million into 148 businesses, including 95 new companies.

Venture

Our Northern VCTs transacted nine investment disposals across both older legacy assets and newer early-stage portfolio companies. Exits across the year included the VCT's holdings in Intelling Group Ltd, Project Glow Topco Ltd t/a Currentbody.com and Mojo Mortgages Ltd, plus partial disposals of Oddbox Ltd and musicMagpie plc. The overall performance was impacted by a reduction in the valuation of listed AIM investments in the quarter to 31 March 2022.

Mercia's EIS funds completed 19 transactions, with 11 'follow-ons' and 8 new businesses. This was a strong year for EIS where we focused our capital and expertise in thematic areas. Strong returns and positive impact have come where we have supported and accelerated companies addressing societal needs. Our first Knowledge-intensive Impact EIS Fund that recently raised c.£5million will invest in high-growth businesses that generate a positive social impact, an area that has increasingly become an important driver of our broader investment decision making.

Our regional venture funds have also performed well. The North East Venture Fund ("NEVF") completed 16 transactions during the financial year, investing a total of £8.0million. This included a follow-on investment of £1.2million into Elmtronics Ltd, a business that was formed in February 2019 to supply, install and maintain electric vehicle chargers, and has since developed a software solution for remote monitoring. Having received an approach from a strategic trade acquiror, NEVF successfully exited the business in January 2022.

MEIF has had another solid year having invested £4.3m in 12 transactions. The Fund has continued to provide follow-on capital to its portfolio companies such as Aceleron Ltd and Locate Bio Ltd. Wherever possible, MEIF seeks to build strong syndications and new deals such as Black Country-based Givepenny Technologies Ltd and Chesterfield-based InVMA Ltd follow this philosophy and demonstrate the strength of Mercia's regional network in finding and investing in thriving regional businesses.

NPIF Equity invested £14.0million in 24 transactions, including £8.2million into eight new portfolio companies, such as the Leeds-based legal technology business, Just: Access Ltd, which was founded by a female barrister. Tees-based Clean Tech business Nova Pangaea Technologies (UK) Ltd has created a process to enable the conversion of discarded plant biomass into advanced biofuels, including aviation fuel and other sustainable biocarbons, and which is led by experienced CEO Sarah Ellerby. During the year, NPIF Equity benefited from the sale of Faradion, a joint investment with Mercia's balance sheet. Sheffield-based Clean Tech business Libertine PLC's AIM flotation in December raised gross proceeds of £9.0million for investment in continued technical and commercial development.

Three investments were made during the year by Mercia's private equity team. These three transactions saw a total of £9.3million invested into UK Landscapes Holdings Ltd, a specialist landscaping and grounds maintenance business based in Cheshire, that serves blue-chip companies such as Asda, John Lewis, Shell and Santander plus Coventry-based UK Mail Digital Ltd to support its buy-out from DHL Parcel UK Ltd. ParkVia Ltd, an online car parking booking platform, received follow-on investment as it emerged well out of the COVID-19 pandemic and is now performing ahead of budget.

Mercia's Debt funds' team saw a slight reduction in enquiries during the year, completing 63 transactions (2021: 70), investing a total of £13.4million, of which £10.3million was provided to 48 new businesses. The Group announced a further extension of its NPIF debt mandate, which was increased by £10.9million, with the investment period being extended to December 2023. In August 2021, Mercia was also accredited to deliver loans via the government's Recovery Loan Scheme. Mercia's vastly experienced Debt team continue to support profitable SMEs, mainly across the North of England.

We have continued to promote our 'Complete Connected Capital' with co-investment by various Mercia-managed funds and Mercia's balance sheet, into Intechnica, Forensic Analytics and Pimberly.

Post period events

Direct investments VirtTrade Ltd and Impression Technologies Ltd both received follow-on funds totalling £1.0million, and a further £0.2million has been invested into both Eyoto Group Ltd and W2 Global Data Solutions Ltd, following continuing commercial and technical progress. Overall, good progress is being maintained across our direct portfolio.

Summary and look forward

This has been an incredible year for Mercia in what again has been a volatile period, where the global environment, working practices and sentiment have continued to change unpredictably. From coming out of lockdown in early 2021, through new levels of freedom last summer and then the re-appraisal with Omicron in the autumn, our investee companies have also had to deal with supply chain issues and, more recently, serious military conflict, rising prices and the uncertainty that these matters bring.

From an investment perspective, we have and will continue to steer our activity toward those areas where we see longer-term structural changes and growth. Mercia's investment model is now delivering, with much more to come. We typically hold direct investments for three to seven years ahead of a trade sale or IPO. With the creation of a shadow portfolio, being tracked from the over 260 venture businesses within Mercia's managed-fund portfolios, we can add the right investment at the right time to ensure balance across sector and stage of growth, and at the right valuation inflection point.

Our businesses in cyber security and the intelligent use of big data have all grown and we expect this will continue, as have those involved in the identification, selection and welfare of staff in the workplace. The pace of change in moving to cleaner energy, as witnessed by innovations in the electric vehicle sector, is remarkable. We are seeing significant activity as traditionally slow-moving OEMs look for an 'edge' for consumers, alongside weight and cost savings, giving added momentum to Warwick Acoustics, Impression Technologies and our other Deep Tech investments, that innovate around the human/machine interface.

And of course, in Digital, where consumers continually search for increasingly 'better' entertainment and more efficient ways to address their healthcare needs; our Games businesses and Digital Healthcare companies will all continue to prosper.

As always, I would like to thank all of the talented investment and operations team members at #OneMercia for their efforts throughout another challenging year. In generating over £250million in realisations over the past two years, we have proven our business model and investment credentials as a pro-active specialist asset manager. Given our mix of assets across sectors and, in particular, our exposure to the growth themes identified above, I remain optimistic for the years ahead.

We must not ignore the chill winds of inflation, ongoing supply chain issues and the uncertainty caused by military conflict. However, Mercia's funds-first business model, our experienced and hugely committed #OneMercia team, plus Mercia's strong liquidity across both funds and balance sheet, give me confidence that we will continue to thrive, regardless of whatever the year ahead throws at us.

Julian Viggars
Chief Investment Officer

Chief Financial Officer's review

Robust results and business fundamentals

The significance of Mercia's financial results for the year ended 31 March 2022, is that they demonstrate that the previous year's record results were not a 'one-off'. These results were generated from both the Group's profitable fund management operations and its maturing direct investment portfolio. This combination of recurring profits and cash flow generation from both our fund management operations and balance sheet investment portfolio, is a key differentiator in the specialist asset management sector.

Overall financial performance

The gradual emergence from the economic and social impact of the pandemic during the second half of the financial year, enabled the Group to maintain its profitable fund management and direct investment momentum. Excluding performance fees received, revenue continued to increase and as meeting and travel restrictions eased and budgeted staff recruitment levels were reached, Mercia ended the year back on a 'normal' trading footing. The second half of the financial year also saw two new direct investments join the balance sheet portfolio (Forensic Analytics and Pimberly), the highly profitable sale of Faradion and just prior to the year end, a significant new third-party investment into nDreams, at a materially higher valuation than the previous carrying value.

For the year as a whole therefore, the Group exceeded the first of its three-year 'Mercia 20:20' average annual pre-tax profit target of £20.0million, with pre-tax profits of £27.4million.

Proposed final dividend

The Board adopted Mercia's progressive dividend policy in December 2020, and since then has announced interim dividends of 0.1 pence per share in December 2020 and 0.3 pence per share in December 2021. Shareholders also approved a maiden final dividend of 0.3 pence per share in September 2021.

Given the Group's twin sources of profitability and cash inflow, the Group's dividend policy does not need to be anchored to one or other earnings source, hence the Board's intention to grow total dividends year on year.

The continuing strong Group performance coupled with its positive future prospects, now enables Mercia's Board to recommend a proposed final dividend of 0.5 pence per share. If approved by shareholders at September 2022's Annual General Meeting, the total dividend for the year will be 0.8 pence per share (2021: 0.4 pence per share). If approved by shareholders, the final dividend will be paid on 11 October 2022 to shareholders on the register at close of business on 23 September 2022, with the total dividend payable being £2,201,000 (2021: £1,320,000).

Adjusted operating profit - alternative performance measure ("APM")

The Directors believe that the reporting of adjusted operating profit assists in providing a consistent measure of operating performance and is an important APM of interest to shareholders.

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

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

A reconciliation of the results reported on an APM basis to International Financial Reporting Standards ("IFRS") is as follows:

The Group acknowledges the recent recommendations of the Financial Reporting Council, that APMs should not be given greater prominence over its financial results reported under IFRS. In future years therefore, the Group will highlight and reconcile its results under IFRS to its APMs, rather than reconcile its APMs to its results under IFRS. As an example, only exceptional performance fees receivable, together with any associated staff bonus accrual, will be reported separately within the overall calculation of adjusted operating profit.

Revenue

Revenue¹ increased 7.2% to £20,576,000 (2021: £19,186,000) and comprised fund management related fees, initial management fees from investment rounds, investment director monitoring fees and sundry business services income. Excluding the impact of VCT share offer fees received in the year ended 31 March 2021, the like-for-like increase was c.15%.

Administrative expenses

Administrative expenses¹, excluding depreciation, increased 4.5% to £16,618,000 (2021: £15,897,000) and comprised predominantly staff-related, office, marketing and professional adviser costs. Removing the impact of VCT share offer related costs incurred in the year ended 31 March 2021, the like-for-like increase was c.14%.

As Mercia's assets under management continue to grow and the financial benefits of operational leverage continue to be realised, the Group will ensure that an appropriate balance is kept between its investment expertise and its support functions' capacity and capability, to maintain its control environment and corporate governance culture.

Net finance income

Investment rounds into the Group's direct investment portfolio are generally either equity and/or convertible/non-convertible loans. As the portfolio continues to mature and either funding rounds with third-party investors occur or successful exits are achieved, the interest entitlement attached to these loans is typically converted into either additional equity or, on a full exit, paid to Mercia in cash. At the point of conversion/payment the interest is recognised as taxable finance income. Until the loans are converted/repaid and the interest entitlement crystallises, there is never any certainty that the interest entitlement will be crystallised into additional equity/paid. During the year, a number of convertible loan interest entitlements crystallised, the largest being in connection with the sale of Faradion. Non-convertible loans by Mercia to direct investee companies may have redemption premiums attached thereto. During the year, one such redemption premium, also in connection with the sale of Faradion, was received in cash and this is also accounted for as taxable finance income.

Total gross finance income of £4,452,000 (2021: £68,000) therefore arose primarily from both crystallised loan interest and redemption premiums. Finance costs of £15,000 (2021: £20,000) comprised interest payable on office leases and the Group's new staff electric car scheme.

Performance fees and attributable variable compensation

Performance fees can become receivable under certain of the Group's fund management mandates, when pre-determined performance hurdles are exceeded. During the year, performance fees totalling £2,607,000 (2021: £4,224,000) were received, predominantly from Northern Venture Trust PLC, based upon the growth in its net asset value per share above a hurdle for the year ended 30 September 2021. Attributable VCT investment team bonuses (including employer's National Insurance) totalling £1,015,000 were paid (2021: £445,000).

Realised gain on disposal of investment

During the year, a realised gain of £9,878,000 (2021: £20,251,000) arose on the disposal of Mercia's equity holding in Faradion. Total cash proceeds of £19,402,000 were received upon completion, comprising £16,309,000 from the sale of the Group's equity holding, a loan repayment of £1,500,000, loan redemption premium of £1,500,000 and loan interest of £93,000. Loan redemption premiums and interest, totalling £738,000 were converted into equity immediately prior to disposal of the Group's total equity holding. Under the terms of the sale agreement, 5% of the equity sale proceeds were required to be ring-fenced for 90 days, pending any claim as to title. As expected, no claims were received and the ring-fenced proceeds of £815,000 were released on 5 April 2022.

Fair value movements in investments

Net fair value increases during the year totalled £11,385,000 (2021: £10,088,000) and as at 31 March 2022, the fair value of the Group's direct investment portfolio was £119,558,000 (2021: £96,220,000). For the year as a whole, unrealised fair value gains arose in 10 (2021: 11) out of the Group's 23 (2021: 23) direct investments. The largest fair value gain was in respect of nDreams, which accounted for £6,734,000 of the total (2021: £3,509,000 fair value gain in respect of AIM-listed MyHealthChecked plc). There were three (2021: four) fair value decreases, the largest being £2,856,000 which arose in respect of MyHealthChecked plc (2021: £439,000 fair value decrease in Eyoto).

Share-based payments charge

The £1,109,000 non-cash charge (2021: £543,000) arises from the net increase in the total number of issued share options held by all employees throughout the Group, ranging from 31 July 2019 to 31 March 2022.

Amortisation of intangible assets

The amortisation charge for the period of £2,033,000 (2021: £2,317,000) represents amortisation of the acquired intangible assets of the VCT fund management business.

Movement in fair value of deferred consideration

The VCT fund management contract's total purchase price has a number of contingent deferred consideration elements payable over a three-year period. The total deferred consideration was fair valued at the date of acquisition in 2019. The charge to the income statement of £522,000 represents the unwinding of the discount on the second deferred consideration payment made in December 2021 (2021: £365,000).

Taxation

The components of the Group's tax charge are shown in note 9. The Group fully utilised its remaining historic trading losses during the year, which were available to set off against taxable profits. The scale of the Group's recent taxable profits (arising predominantly from net VCT performance fees and finance income) has resulted in the utilisation of the Group's remaining historic tax losses faster than previously anticipated.

The overall tax charge for the year also comprises the annual unwinding of the deferred tax liability in respect of the acquisition of the VCT fund management business, offset by both the impact of the enacted change in tax rate from 19% to 25% on the Group's deferred tax liability as at 31 March 2022, and a corporation tax charge on taxable profits over and above what has been offset against the remaining brought-forward tax losses.

Profit and total comprehensive income for the year

The adjusted operating profit, net performance fees, realised gain on the sale of Faradion and net fair value increases for the year as a whole, all contributed favourably to a consolidated total comprehensive income of £26,100,000 (2021: £34,458,000). This has resulted in basic earnings per Ordinary share of 5.93 pence (2021: 7.83 pence).

Summarised statement of financial position and cash flows

     *      440,109,707 Ordinary shares were in issue during the years ended 31 March 2022 and 31 March 2021.

Net assets per share increased by c.14% during the year, notwithstanding the payment of dividends totalling £2,641,000 (2021: c.24% growth after dividends paid of £440,000).

Intangible assets

Details of the Group's intangible assets are given in notes 12 and 13 of the summary financial information, and consist of goodwill and the intangible asset recognised on the acquisition of the VCT fund management business.

Direct investment portfolio

During the year under review, Mercia's direct investment portfolio grew from £96,220,000 as at 1 April 2021 (2021: £87,471,000 as at 1 April 2020) to £119,558,000 as at 31 March 2022 (2021: 96,220,000), a c.24% increase notwithstanding the sale of Faradion during the year (2021: c.10% increase).

The Group invested £18,384,000 net (2021: £15,397,000) into 14 existing and two new direct investments (2021: 17 and two respectively), with the top 20 direct investments representing 98.6% of the total direct investment portfolio value (2021: 98.5%).

Cash and short-term liquidity investments

At the year end, Mercia had cash and short-term liquidity investments (which is cash on deposit with maturities of between 32 days and three months) totalling £61,284,000 (2021: £54,725,000), comprising cash of £56,049,000 (2021: £54,491,000) and short-term liquidity investments of £5,235,000 (2021: £234,000). The Group held no cash on behalf of third-party EIS investors as at 31 March 2022 (2021: £2,484,000), following the appointment of an external custodian during the year.

The Group continues to have limited working capital needs due to the nature of its business and generated net operating cash inflow of £9.2million (2021: £5.6million net inflow).

The overriding emphasis of the Group's treasury policy remains the preservation of its shareholders' cash for investment, corporate and working capital purposes, not yield. As at 31 March 2022, the Group's cash and short-term liquidity investments were spread across four leading United Kingdom banks.

The summarised movements in the Group's cash and short-term liquidity investments position during the year is shown below.

Outlook

Notwithstanding the economic and social ravages of the pandemic, Mercia has made significant progress in the last two years. During this two-year period the Group has generated over £60million of pre-tax profits, on headline revenues of c.£40million. With an excellent team of #OneMercia employees, fund management profitability established, net assets having passed £200million, a secure liquidity position and its dividends increasing, Mercia has established both strong cultural and business foundations from which to continue to grow total shareholder value in the years ahead.

As the worst near-term effects of the pandemic begin to subside, current macro-economic and geo-political tremors cast near-term clouds over stock market sentiment. Whilst valuations may fluctuate from time to time, Mercia's funds under management are not 'open-ended' and therefore at risk of redemption calls. The long term contracted nature of our funds under management therefore underpins our annual revenues and with it, operating cash inflow and dividends to shareholders. Add to this our fast maturing direct investment portfolio, which has very limited public markets exposure, and Mercia faces the future with optimism, built on robust business fundamentals.

Martin Glanfield

Chief Financial Officer

Summary Financial Information

Consolidated statement of comprehensive income

For the year ended 31 March 2022

All results derive from continuing operations.

Consolidated statement of financial position

As at 31 March 2022

Consolidated statement of cash flows

For the year ended 31 March 2022

Consolidated statement of changes in equity

For the year ended 31 March 2022

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, Warwickshire B95 5AA.

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 2022, 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 2022 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

Based on the strength of the Group's significant liquidity position at the year end, its forecast future operating and investment activities and, having considered the impact of COVID-19 and the war in Ukraine on the Group's operations and portfolio, the Directors have a reasonable expectation that the Group has adequate financial resources to manage business risks in the current economic environment, and 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 these consolidated financial statements.

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 financial statements of entities held within the Group's direct investment portfolio are not included within the consolidated financial statements as the Group accounts for these in accordance with the IFRS 10 Investment Entity exemption.

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 vendors is measured at fair value at acquisition and re-assessed annually, with particular reference to the conditions upon which the consideration is contingent.

New standards, interpretations and amendments effective in the current financial year

No new standards, interpretations and amendments effective in the year have had a material effect on the Group's financial statements.

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 mean there is risk of a material adjustment to the carrying amounts of assets and liabilities. These judgements include a decision on 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 in December 2018, with consideration given to the Coronavirus Special Valuations Guidance issued in March 2020.

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 the investment round 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 of reliability of using estimates 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.

The recent macroeconomic uncertainty has created uncertainty in the fair value of the direct investment portfolio. The Directors believe that they have reflected this uncertainty in a balanced way through the assumptions used in the valuation of each investee company. 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.

Valuation of deferred consideration

The fair value of the deferred consideration payable in respect of the acquisition of its VCT fund management business, which is contingent upon certain conditions being met, has been estimated with reference to the contractual obligations as at 31 March 2022. The conditions upon which payment of the deferred consideration is contingent are outlined in note 16.

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 discounted value of the deferred consideration as at 31 March 2022 would reduce by £100,000.

5. Segmental reporting

The Group's revenue and profits are derived from its principal activity within the United Kingdom.

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

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

6. Fair value movements in investments

7. Operating profit

Operating profit is stated after charging:

8. Finance income

Finance income is derived from:

9. Taxation

The UK standard rate of corporation tax is 19% (2021: 19%). The deferred tax credit of £508,000 (2021: £440,000) represents the unwinding of the deferred tax liability recognised in respect of the intangible assets arising on the acquisition of the VCT fund management business.

A reconciliation from the reported profit to the total tax (charge)/credit is shown below:

An increase in the UK corporation tax rate from 19% to 25%, with effect from 1 April 2023, was substantively enacted on 24 May 2021. The Group's deferred tax liability has been calculated at a rate of 25% as at 31 March 2022 (2021: 19%).

A deferred tax liability of £3,928,000 (2021: £3,372,000) continues to be recognised in respect of the intangible assets arising on the acquisition of the VCT fund management business in December 2019.

A potential deferred tax asset of £4,442,000 (2021: £5,722,000) for cumulative unrelieved management expenses and other tax losses has not been recognised as their future use is uncertain.

10. Earnings per share

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

The calculation of basic and diluted earnings per share is based on the following weighted average number of Ordinary shares:

11. Dividends

The final dividend for the year ended 31 March 2022 proposed by the Board of 0.5 pence per share, totalling £2,201,000, is subject to shareholder approval at the Annual General Meeting on 13 September 2022, and as such has not been included as a liability in these financial statement in accordance with IAS 10.

12. Goodwill

Goodwill arising on the businesses acquired to date is set out in the table below.

Goodwill for each business acquired has been assessed for impairment as at 31 March 2022. Recoverable amounts for each cash generating unit ("CGU") are based on the higher of value in use and fair value less costs of disposal.

The value in use calculations are based on future expected cash flows generated by each CGU, as derived from the approved budget for the year ended 31 March 2023. Key assumptions are a discount rate of 10% and the growth rates used in forecasting future operating results. Where the fund management contracts are 'evergreen', a value into perpetuity has been used based on a zero growth rate beyond a five-year forecast period.

The review concluded that the value in use of each CGU exceeds its carrying value. The Directors do not consider that a reasonably possible change in a key assumption would reduce the recoverable amount of the CGUs to their carrying value.

13. Intangible assets

Intangible assets represent contractual arrangements in respect of the acquired VCT fund management business and the acquisition of Enterprise Ventures Group, 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. The intangible asset recognised on the acquisition of Enterprise Ventures Group in 2016 became fully amortised in March 2021.

14. Investments

The net change in the value of investments for the year is an increase of £23,338,000 (2021: £8,749,000). The tables below reconcile the opening to closing value of investments.

On 8 June 2020, Crowd Reactive Limited repaid a £150,000 debt investment made by the Group.

On 9 July 2020, the Group sold its investment in The Native Antigen Company Limited for a total cash consideration of £5,248,000, recognising a realised gain of £1,755,000.

On 19 October 2020, the Group sold its investment in Clear Review Limited for a total cash consideration of £1,043,000, recognising a realised gain of £543,000.

On 1 March 2021, the Group sold its investment in Oxford Genetics Limited for a total cash consideration of £30,696,000, recognising a realised gain of £17,953,000.

On 4 January 2022, the Group completed the sale of its investment in Faradion Limited, generating a realised gain of £9,878,000. Total cash proceeds of £19,402,000 were received upon completion, comprising £16,309,000 from the sale of the Group's equity holding, a loan repayment of £1,500,000, a loan redemption premium of £1,500,000 and loan interest of £93,000. Additional loan redemption premiums and interest, totalling £738,000, converted into equity immediately prior to disposal of the Group's total equity holding.

Investments held as part of the Group's direct investment portfolio are carried in the statement of financial position at fair value in accordance with the IFRS 10 Investment Entity exemption.

The measurement basis for determining the fair value of investments held at 31 March is as follows:

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

15. Cash, cash equivalents, short-term liquidity investments and restricted cash

As at 31 March 2022, the Group held £815,000 of proceeds from the disposal of Faradion Limited, a direct investment sold on 4 January 2022 (see note 14). Under the terms of sale, 5% of the equity sale proceeds were required to be ring-fenced for 90 days post completion. On 4 April 2022 the holding period lapsed and these proceeds became available for use by the Group. As at 31 March 2022 this amount is recorded within cash and cash equivalents.

The Group no longer holds cash on behalf of third-party EIS investors (2021: £2,484,000).

16. Deferred consideration

On 23 December 2019 Mercia completed the acquisition of the Northern VCT fund management business 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 following 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, in addition to £2,100,000 payable in new Ordinary Mercia shares on the third anniversary. In December 2020 and December 2021, the first and second cash instalments of £2,100,000 respectively, were paid by the Group.

Half of the deferred consideration shares will be payable if the Group has received at least £16,000,000 in fund management fees in respect of the Northern VCT contracts (excluding performance fees) 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 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 the deferred consideration is based on a weighted probability of outcomes over the remaining period discounted by 10%. The fair value movement in deferred consideration during the year resulted in a charge to the income statement of £522,000 (2021: £365,000).

17. Deferred taxation

Under IAS 12 Income Taxes, provision is made for the deferred tax liability associated with the recognition of the intangible asset arising on the acquisition of the VCT fund management business. As at 31 March 2022, the deferred tax liability has been calculated using the substantively enacted tax rate of 25% - see note 9 for further detail.

18. Issued share capital

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

19. Share premium

20. Other distributable reserve

21. Fair value measurements

The fair values of the Group's financial assets and liabilities are considered a reasonable approximation to the carrying values shown in the consolidated statement of financial position. Subsequent to their initial recognition at fair value, measurements of movements in fair values of financial instruments are grouped into Levels 1 to 3, based on the degree to which the fair value is observable.

The following table gives information about how the fair values of these financial assets and financial liabilities are determined and presents the Group's assets that are measured at fair value. There have been no movements in financial assets or financial liabilities between levels during the current or prior years. The table in note 14 sets out the movement in the Level 1 and 3 financial assets during the year.

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

Financial instruments in Level 1

The Group had one direct investment listed on AIM, MyHealthChecked plc, which is valued using the closing bid price as at 31 March 2022.

Financial instruments in Level 3

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

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

Note 4 of 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.

22. Availability of Annual Report

The Annual Report of Mercia Asset Management PLC will be posted to all shareholders on 29 July 2022. An electronic copy will also be available on Mercia Asset Management PLC's website at www.mercia.co.uk.

23. 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 13 September 2022 at 10:00 am.

Directors, secretary and advisers

Directors

Ian Roland Metcalfe                                      (Non-executive Chair)

Dr Mark Andrew Payton                             (Chief Executive Officer)

Martin James Glanfield                                (Chief Financial Officer)

Julian George Viggars                                    (Chief Investment Officer)

Diane Seymour-Williams                             (Senior Independent Director)

Raymond Kenneth Chamberlain              (Non-executive Director)

Dr Jonathan David Pell                                 (Non-executive Director)

Caroline Bayantai Plumb OBE                    (Non-executive Director)