Financial report

Summary

The Group generated a profit of £5.3 million in the year to 31 July 2009 (2008: loss £5.9 million). Cash and short-term liquidity investments remained healthy at £30.7 million (2008: £43.1 million).

Increase in profits for the year

The balance sheet was strengthened, ending the year with net assets up by £5.3 million to £85.6 million, reflecting the Group’s performance including the upward revaluation of the portfolio.

Increase in Net Assets over the year

The Group achieved total realisations of £12.1 million from the full or partial disposal of four investments, which generated gross realisations of £4.3 million, a further £6.0 million in deferred contingent consideration and a reduction of revenue sharing liabilities of £1.8 million (resulting from the transfer of part of the Group’s stake in Ceres Power Holdings plc in satisfaction of revenue sharing liabilities to Imperial College London).

The Group invested £14.4 million across 20 portfolio companies (2008: £6.4 million).

Revenues, cost of sales and operating costs

Total revenues decreased 19% from £5.3 million to £4.3 million, mostly because of decreased revenues from up-front fees on licensing and technology transfer, and partially offset by increased royalty income and corporate finance fees and other activities.

Royalty revenue from intellectual property licences increased to £1.2 million (2008: £0.9 million). Income from initial licence payments was £0.8 million (2008: £1.7 million), reflecting in part the wider economic climate and the reduction in up-front fees.

The intellectual property management consultancy fees received from Imperial College London and others was £1.3 million (2008: £1.6 million). This expected decrease on the previous year’s income reflects Imperial College London taking on more of the administrative burden of the IP due diligence and management under the terms of the Technology Pipeline Agreement. However, this was offset by a £0.2 million increase in corporate finance fees to £0.5 million (2008: £0.3 million) and other income was £0.5 million (2008: £0.8 million).

The cost of sales, arising largely from the revenue-sharing arrangement with Imperial College London, decreased by 27% to £1.1 million (2008: £1.5 million). This principally reflects decreased licensing activity. Also higher prior year costs reflect the higher revenue share on the development phase of a particular significant licence contract during 2008.

Operating costs (excluding the share based payment charge) increased slightly from £6.7 million to £6.8 million. Of this, £1.3 million (2008: £1.3 million) was expenditure incurred filing patents and protecting the Group’s as-yet unexploited intellectual property.

As a result of an internal reorganisation, the Group’s cost base has been reduced by £0.8 million per annum, although the associated redundancy and reorganisation costs resulted in a one off charge of £0.3 million this year. The full financial benefit of this reorganisation should be felt in the 2009 – 2010 financial year.

Interest income was £2.0 million (2008: £2.3 million), reflecting the scale of the Group’s cash balance.

The Group reported a profit of £5.3 million (2008: loss £5.9 million) with Group earnings per share of 9.23p (2008: loss per share 10.63p). The Board is not recommending the payment of a dividend.

Cash

The Group ended the year with total cash reserves of £30.7 million, comprising £1.4 million of cash and £29.3 million of short-term liquid resources.

Cash reserves remaining healthy

This is a decrease of £12.4 million from the opening balance of £43.1 million on 1 August 2008 and can be analysed as follows.

	2009 £m	2008 £m
Net cash used in operating activities	(3.7)	(4.8)
Purchase of trade investments	(14.0)	(6.2)
Net proceeds from sale of trade investments	3.4	3.3
Net cash used from other investing activities	8.6	(34.0)
Financing activities (issue of net equity)	-	29.3
Movement during year	(5.7)	(12.4)
Adjustment for short term liquidity investments	(6.7)	36.0
Movement in net cash reserves	(12.4)	23.6

The Group invests cash surplus to working capital requirements in short-term deposits, classified as short term liquidity investments, across a number of banks with a focus on capital preservation rather than interest earned. The Group has no foreign currency deposits.

Investment Portfolio Performance

During the year the Group’s investment portfolio grew from £50.9 million spread across 89 companies, to £55.8 million across 80 companies. Portfolio companies raised more than £41 million from all sources of investment during the year.

The fair value of the Group’s technology company holdings increased by £3.3 million (2008: £7.1 million loss), before taking into account associated revenue sharing obligations, and by £6.9 million (2008: £3.0 million loss) after these obligations.

Portfolio movements excluding cash invested	2009 £m	2008 £m
Gains on the revaluation of investments	12.3	4.0
Losses on the revaluation of investments	(9.0)	(11.1)
Fair value gains / (losses)	3.3	(7.1)
Movement in associated revenue sharing obligations	3.6	4.1
Net fair value gain / (loss)	6.9	(3.0)

(Based on International Private Equity and Venture Capital Valuation Guidelines (IPEVCVG))

Investment and Divestment Activity

During the year, the Group made £14.4 million of investments to fund 20 technology companies in its portfolio. The early stage nature of many of the technology companies is such that investments are made on a milestone/tranche basis that matches the companies’ need for cash with the achievement of agreed milestones. This provides investment security for the companies and more control over the Group’s cash payments to the portfolio.

Additional investment commitments undrawn at the year end amounted to £3.1 million. Additionally, some investments are made as convertible loans and at the year end there was a total of £7.5 million outstanding, which is included in fixed-asset investments.

The Group realised net cash proceeds after revenue sharing obligations of £3.9 million (2008: £3.3 million) from the partial realisation of four investment assets. Total net investment after net cash disposals in the year was £10.6 million (2008: £3.0 million).

Portfolio company creation

At 31 July 2009 the Group held equity stakes in 80 companies (2008: 89 companies). A total of 20 companies in the portfolio achieved successful follow-on funding rounds during the year. Equity acquired relates to equity stakes acquired in companies in consideration for licences granted or services rendered. The movement reflects disposals, formations less dissolutions and liquidations during the year.

During the course of the year the Group moved away from forming companies early as the kernel of the new spin out and has kept these as unincorporated projects until the opportunity has been developed more substantially. As a result of this the number of new companies formed in the year at 4 (2008: 11 companies) is reduced significantly from the previous years. This reduction is a reflection in the change in the business practise and does not reflect on a reduction in the number of propositions being developed in the Group. The number of companies seed funded with launch management teams was 6 (2008: 4 companies).

Portfolio company overview

The table below sets out the top 10 technology companies, by value, in the portfolio including contingent deferred consideration, to illustrate the spread of the investments held and their relative carrying value. All of the carrying values listed below reflect the net fair value of the investment, being the gross value of the holding less the attributable revenue-sharing obligations associated with each investment. The percentage of issued share capital represents the absolute percentage of the shares held, without reflecting any revenue-sharing obligations.

Name of company	Note	Net investment carrying value at 31 July 2008	Cash invested / (cash divested) 12 months to 31 July 2009	Net movement in carrying value 12 months to 31 July 2009	Net investment carrying value at 31 July 2009	% of Issued share capital held 31 July 2009
		£’000	£’000	£’000	£000
Ceres Power Holdings plc		4,454	-	629	5,083	3.6%
Circassia Holdings Limited		7,267	-	-	7,267	14.2.%
EVO Electric Limited	A	744	1,000	-	1,744	37.6%
Molecular Vision Limited	B	300	1,000	107	1,407	57.2%
Nexeon Limited	C	3,196	4,000	4,131	11,327	35.0%
Osspray	D	441	950	-	1,391	40.0%
Process Systems Enterprise Ltd		1,280	-	-	1,280	25.4%
Respivert Limited		1,120	923	-	2,043	13.4%
Thiakis Limited	E	2,642	(2,856)	6,211	5,997	-
Veryan Medical Limited	F	3,217	2,500	-	5,717	37.6%

1. On 28 September 2008 the Group invested a total of £1 million in Evo Electric as part of a funding round supported by the company’s existing shareholders. It’s stake in the company is 37.6%.
2. On 18 June 2009 the Group invested £1 million in Molecular Vision to bring its stake to 57.2% as part of a larger £2 million funding round in Molecular Vision, an emerging developer of quantitative point-of-care (POC) diagnostic devices. The Group has committed £1.5 million, with Acrongenomics Inc, another existing shareholder, also participating in the round.
3. On 10 February 2009 the Group invested a further £4.0 million in Nexeon as part of a £10 million funding round. The impact of this investment was to generate a £4.4 million gross fair-value uplift and so increase the value of the gross investment from £3.4 million to £11.8 million (£11.4 million net). The revenue-sharing liabilities associated with the shareholding in Nexeon increased by £0.2 million to £0.4 million. After accounting for the revenue-sharing liabilities, the net carrying value of the investment in Nexeon (and profit recognised in the Income Statement) increased by £4.1 million.
4. On 3 July 2009 the Group increased its stake in OSspray, an emerging speciality dental company, following a further drawdown which took investments made by the Group to £1.0 million in the year. Its co-investors included NESTA and The Capital Fund, managed by Yorkshire Fund Managers.
5. On 18 December 2008 the Group divested its holding in Thiakis Limited. Under the sales agreement, the Group could receive cash payments of £22.2 million (net of transaction costs). After revenue-sharing obligations of £6.1 million payable to Imperial College London and other research sponsors, the net receipt to the Group would be £16.1 million. As at 31 July 2009, the first payment of £3.3 million had been received. After revenue-sharing obligations, the net receipt is £2.9 million. The payment received to date results in a fair-value uplift to the income statement of £0.2 million. The estimated fair-value uplift of the contingent deferred consideration, after risk adjustment using industry-standard criteria and discounting for time at 12% per annum, results in a fair value uplift to the income statement from the contingent deferred consideration of £6.0 million. At each accounting reference date the fair value of the contingent deferred consideration will be adjusted. The £6.0 million represents contingent deferred consideration and is therefore held within trade and other receivables.
6. The Group invested a further £2.5 million in Veryan Medical, maintaining the value of its existing stake so that the resulting net carrying value is £5.7 million.

In July 2009 the Group sold its stake in InforSense to IDBS for £0.9 million in cash at completion, with a further deferred performance-related payment estimated to be about £0.1 million.

Deferred payment obligations

Non-current liabilities decreased from £12.7 million to £5.7 million at the end of 2009, reflecting the decrease in the revenue-sharing obligations to Imperial College London and other parties arising on the revaluation of investments in technology companies and the transfer of £1.8 million of shares in Ceres Power Holdings plc to Imperial College London in satisfaction of the revenue sharing obligation under the TPA due on the Group’s shareholding in Ceres Power Holdings plc.

University Challenge Seed Fund

The University Challenge Seed Fund (UCSF) reflects an award made by the UK government and third parties and must be deployed according to the conditions of that award. The purpose of the fund covers seed investment and funds for proof of concept awards.

These terms include a restriction on distribution of monies from UCSF investments until the fund size has reached a multiple of three times the original investment of £4.15 million, excluding donations from industry parties.

The corresponding creditor balance is reflected on the balance sheet under ‘non-current liabilities’. The decline in the value of this asset in the period arises mainly as a result of write downs in equity and loan balances in addition to the costs of running the fund.

Share-based payments

Share-based payments made to Group Directors and staff are accounted for under International Financial Reporting Standard (IFRS) 2, ‘Share-based Payment’ which requires that for share option awards to employees, the fair value of the employee services received should be measured by reference to the fair value of the share option at the grant date, with the charge being spread over the vesting period. This results in a charge to the Income Statement.

The assumptions used in calculating the charge are set out in detail in note 7 to the accounts. As all of the options had fully vested and become exercisable subject only to share-price performance conditions in April 2008, there was no charge in the year (2008: £3.2 million). As this is a non-cash item the total amount charged is reflected in the ‘share-based payment reserve’ and therefore does not impact on shareholders’ equity.

Fixed-asset investments

All equity investments held by the Group are defined as financial assets under International Accounting Standard (IAS) 32 ‘Financial Statement: Disclosure and Presentation’ and are classified as financial assets held at fair value under IAS 39, ‘Financial Instruments: Recognition and Measurement’. This includes all UCSF/LCSF equity investments.

Under IAS 39 the carrying value of all investments is measured at fair value with changes in fair value between accounting periods being charged or credited to the Income Statement.

Taxation

The Group is eligible for Substantial Shareholder Relief as it is a member of a trading group whilst it is a subsidiary of Imperial College London.

However, should the Group cease to be part of the Imperial College London group of companies (i.e. Imperial College London’s holding falls below 50%), transitional rules apply, which are likely to preserve the exemption for a further two years. Therefore, unless Imperial College London reduces its holding to less than 50%, it is likely that the Group will continue to be exempt from taxation on chargeable gains from disposals of substantial shareholdings.

Deferred tax

Full provision for deferred tax under IFRS is made on all temporary differences resulting from the IFRS carrying value of fixed asset investments and its tax base.

Deferred tax is determined using tax rates (and laws) that have been enacted by the Balance Sheet date and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled. However, deferred tax assets and liabilities are only recognised to the extent that it is probable that the deferred tax liability will be payable or the deferred tax asset will be utilised in the future.

Any deferred tax charge or credit is applied through the Income Statement. During the previous year a total of £0.9 million was credited to the Income Statement which arose on the reversal of the deferred tax provision previously accrued in the year ended 31 July 2007 and earlier as a result of unrecognised gains.

Julian Smith
Chief Financial and Operations Officer