TIDMINS
RNS Number : 7446O
Instem plc
03 June 2020
Instem plc
("Instem" or the "Group")
Audited Results for the Year Ended 31 December 2019
Instem (AIM: INS.L), a leading provider of IT solutions to the
global early development healthcare market, announces its results
for the year ended 31 December 2019.
Financial Highlights:
-- Revenues increased 13% to GBP25.7m (2018: GBP22.7m)
o Software as a Service (SaaS) revenues increased 16% to GBP6.4m
(2018: GBP5.5m)
o Recurring revenues (annual support and SaaS) increased 9% to
GBP14.9m (2018: GBP13.7m)
-- Adjusted EBITDA* of GBP4.9m (2018: GBP4.1m)
-- Reported loss before tax of GBP0.9m (2018: profit of
GBP1.7m), after **non-cash goodwill and intangible asset impairment
of GBP3.2m (2018: GBPnil)
-- Adjusted profit before tax*** of GBP3.2m (2018: GBP2.8m)
-- Fully diluted loss per share of (5.7p) (2018: 8.7p earnings per share)
-- Adjusted*** fully diluted earnings per share of 18.4p (2018: 15.5p)
-- Cash balance as at 31 December 2019 of GBP6.0m (2018: GBP3.6m)
*Earnings before interest, tax, depreciation, amortisation ,
impairment of goodwill and capitalised development costs and
non-recurring items. 2019 reflects the adoption of IFRS16.
** This is associated with our Clinical business and covered in
more detail in the Strategic Report.
***After adjusting for the effect of foreign currency exchange
on the revaluation of inter-company balances included in finance
income/(costs), non-recurring items, impairment of goodwill and
capitalised development costs and amortisation of intangibles on
acquisitions. Profit is adjusted in this way to provide a clearer
measure of underlying operating performance.
Operational Highlights:
-- Continued transition to SaaS deployment, increasing recurring revenue
-- Rapidly growing informatics service, automating a key
industry process of "Target Safety Assessment"
-- Earnings enhancing acquisition of Leadscope Inc for up to
$4.7m, extending our artificial intelligence technology offering
and opening up cross-selling and upselling opportunities
-- FDA's S initiative continued to underpin strong technology
enabled outsourced services revenue growth
Phil Reason, CEO of Instem, commented: " We are delighted with
our performance during the period with our proven business model
generating improvements across all of our key performance metrics.
We have an established base from which to grow, both organically
and via acquisition, and have established long-term relationships
with our blue-chip client base. Importantly, we are well positioned
to add new clients and generate increasing revenues from existing
clients while our transition to a SaaS model increases
visibility.
"Increased revenue predictability and high retention rates
provide a strong foundation from which the business can grow as it
builds on the momentum achieved during 2019. While some future
uncertainty inevitably remains as a consequence of the Covid-19
pandemic, the majority of our revenue comes from clients whose
laboratories are regarded as "essential businesses" and therefore
remain active, with many working on COVID-19 related vaccines and
therapies. Consequently, we have remained very busy, have good
visibility over a strong H1 2020 performance and continue to have
confidence in the longer term outlook for the business, supported
by a strong cash balance at the end of April 2020 of GBP8.3m. Our
staff are currently working effectively from home and are highly
motivated by our work which is directly contributing to COVID-19
research and development."
For further information, please contact:
Instem plc Via Walbrook PR
Phil Reason, CEO
Nigel Goldsmith, CFO
N+1 Singer (Nominated Adviser
& Broker) +44 (0) 20 7496 3000
Peter Steel/Alex Bond
Rachel Hayes
Walbrook Financial PR +44 (0) 20 7933 8780
Nick Rome instem@walbrookpr.com
Tom Cooper
Nicholas Johnson
About Instem
Instem is a leading provider of IT solutions & services to
the life sciences market delivering compelling solutions for Study
Management and Data Collection; Regulatory Solutions for
Submissions and Compliance; and Informatics-based Insight
Generation.
Instem solutions are in use by over 500 customers worldwide,
including all the largest 25 pharmaceutical companies, enabling
clients to bring life enhancing products to market faster. Instem's
portfolio of software solutions increases client productivity by
automating study-related processes while offering the unique
ability to generate new knowledge through the extraction and
harmonisation of actionable scientific information.
Instem products and services now address aspects of the entire
drug development value chain, from discovery through to market
launch. Management estimate that over 50% of all drugs on the
market have been through some part of Instem's platform at some
stage of their development. To learn more about Instem solutions
and its mission, please visit instem.com.
Chairman's Statement
Our performance for the full year builds on the momentum
achieved during the first half, with the Company producing strong
results across all business areas whilst strengthening its overall
offering via the acquisition of Leadscope.
We are delighted to report a 13% increase in total revenues
year-on-year. Our strategic move towards high quality SaaS revenues
contributed to a 9% growth in recurring revenues for the period,
providing increased levels of certainty and visibility.
Importantly, the proportional reduction in perpetual licence
revenues makes the business less susceptible to the unpredictable
nature of relying on significant contract wins to meet forecast
expectations.
The cash balance at the year-end was GBP6.0m (2018:
GBP3.6m).
Firm Foundations
Given the successful and ongoing transition to SaaS-based
revenues the Company is benefiting from increasing levels of
predictability whereby revenues are recognised on a monthly basis
over the subscription period. This form of contract is proving
attractive to both existing and new clients. The Company has proven
its ability to manage this strategic change in revenue mix with
SaaS-based orders and revenue growth exceeding the Board's
expectations during the period.
The combination of organic and acquisitive growth during the
period has resulted in a further diversification of revenue streams
while also providing opportunities for the Company to cross-sell
and upsell to existing clients. November's acquisition of Leadscope
strengthened the Company's Artificial Intelligence ("AI") offering.
We see the AI sector as an increasingly important part of our
business and are extremely excited by the growth potential, albeit
from a low base.
Strategic Direction
The business has a number of key growth drivers and we believe
that the momentum achieved during the period provides validation of
its strategic potential. We were delighted to have made notable
progress on a number of fronts during the period, namely:
-- Continued growth in SaaS-based revenues both through new
business wins and via the ongoing conversion of existing clients.
As such, SaaS-based revenue increased 16% to GBP6.4m during the
period;
-- The expansion of "technology enabled outsourced services",
where 2019 revenue was GBP5.6m (2018: GBP3.3m):
o Our market leading offering for the S services business
continued to perform well during the period.
o We strengthened our AI services with increased demand for
Target Safety Assessment ("TSA") driving revenue growth and the
acquisition of Leadscope broadening our offering. This has provided
a new entry point for the Company, consequently strengthening
growth opportunities within our existing client base whilst at the
same time increasing our attraction to new clients.
We have made a non-cash impairment provision of GBP3.2m against
goodwill and other intangible assets in our Alphadas early phase
clinical data collection business, which is commented on in more
detail in the Strategic Report. The proportion of revenue
associated with the clinical business is immaterial in the context
of the Group as a whole.
In light of COVID-19, the Instem Board decided in March 2020
that until any material business risk from the pandemic is behind
us, our 2020 objectives would be moderated so that we can
successfully navigate the crisis. We will strive to ensure that we
retain a global, leading and enthusiastic set of employees, clients
and investors,
who will enable us to capitalise on opportunities as the world
recovers. Consequently, our revised focus will be to:
-- Ensure our staff and their families stay safe, engaged and effective;
-- Provide the products and services that our clients need to continue their important work; and
-- Take appropriate action where necessary to safeguard our
strong and stable financial position.
Notwithstanding COVID-19, our non-organic growth ambitions
remain intact; we continue to evaluate acquisition opportunities
and our strategy to consolidate our fragmented industry is a key
focus. We will maintain our rigorous approach to appraisal and
diligence of any acquisition targets. I remain confident that our
objective to acquire complementary technologies or enter adjacent
markets will be successfully executed, particularly given our
balance sheet strength.
I am pleased to report that our staff have safely and
effectively transitioned to home working, our clients have, on the
whole, continued to operate and Instem is increasingly playing an
important role in contributing directly to their COVID-19 related
research and development activities.
I am extremely satisfied with the Company's performance during
the period as we continued to grow the business organically whilst
providing an increasingly stable revenue model with improved
quality of earnings.
So far in 2020, business has been strong, we anticipate a robust
H1 2020 performance and we are cautiously optimistic that this will
continue through the remainder of the year. In summary we have a
highly scalable platform and are excited by both organic and
acquisitive growth opportunities.
D Gare
Chairman
3 June 2020
Chief Executive's Report
Strategic Development
During the period under review Instem generated positive returns
across the Group with key momentum drivers being:
-- increased levels of recurring revenues;
-- the ongoing transition to high-quality subscription-based SaaS revenues;
-- continued expansion of 'technology enabled outsourced services';
-- growing regulatory-backed opportunities;
-- strong organic growth; and
-- further broadening of our product portfolio via the earnings
enhancing acquisition of Leadscope.
Importantly, the Company delivered increased profit whilst
investing in its products and personnel. This provided capacity and
scope to increase the Company's market share at the same time as
increasing cross-selling and upselling opportunities within the
existing client base.
There was a 78% increase in new business SaaS subscription order
value over the prior year, with the proportion of SaaS subscription
orders compared with perpetual software licenses increasing from
33% in 2018 to 64% in 2019. Some of this increased order value
benefited SaaS revenue in 2019 but the first full year impact will
be realised in 2020.
COVID-19
With both staff and customers based in China, some directly in
Wuhan, Instem's Business Continuity team was engaged at the early
stages of the pandemic. Our first priority was to address personal
safety and to then ensure business continuity for both Instem and
our clients. Our Business Continuity team has continued to
spearhead our response as the crisis has escalated and spread
worldwide.
Like most businesses, we have been closely following and
implementing the advice of agencies, such as the World Health
Organization and US Centers for Disease Control & Prevention,
and quickly introduced international and domestic travel bans, as
well as policies to increase hygiene and social distancing. We
required staff with even mild symptoms to stay at, or work from
home and thus far our operations have not been materially
impacted.
While these measures have had some impact on client-related site
work, we have worked collaboratively with our customers to find
ways to complete much of this work remotely. In some cases, this is
increasing efficiency as we save on both the time and expense of
international travel and we hope to see some enduring benefits as
we, and our clients, realise how much can be achieved in this
way.
Instem is fortunate to have invested heavily over the last 5
years in technology that supports our widely dispersed workforce
and the many staff that already work entirely, or frequently, from
home. Our regulatory compliant framework, certification to quality
standard ISO 9001 and information security management standard ISO
27001, all require us to have a risk management and business
continuity mindset embedded in the organisation. We also reflect
these requirements with the operational partners on whom we rely,
and they have confirmed their ability to continue to support Instem
and our clients during this crisis.
We have quickly, but carefully, moved to a position where all of
our staff are working from home, keeping ahead of those locations
where governmental mandatory "work from home" and/or "shelter at
home" is now in place. As a business supporting critical, life
enhancing/sustaining scientific research and development such as
the activities we are now routinely undertaking to produce S
submissions for COVID-19 related drugs and vaccines, we believe
that we will likely retain the right to attend our offices; however
our personnel are only doing so in exceptional circumstances. We
are starting to see some limited domestic travel to sites in China,
to satisfy prior client commitments, as business there returns to a
"new normal".
While most of our staff are working equally efficiently
remotely, we are addressing situations where staff need to balance
home working with caring for children at home or other dependents,
and also occasions where external network connectivity is
challenged as entire regions are restricted to home working and
schooling.
The immediate disruption to client operations, as they
determined how to adopt safe working practices for their essential
laboratory staff and transitioned other staff to home working,
seems to be largely behind us. Some new business opportunities have
been delayed, principally those in the early phase clinical and
academic sectors, although most 2020 opportunities remain within
the year and, to date, no pipeline opportunities have been
cancelled altogether by clients.
While we cannot be certain what the impact will be of a
sustained period of global business disruption, at this point, we
believe that Instem and the majority of our clients are well
positioned to successfully manage their way through it.
One particularly beneficial impact of the extensive
work-from-home restrictions has been a significant improvement in
the ability for our boutique corporate finance partner to contact
principals in potential acquisition targets, as part of their
target identification and qualification assignment. It has also
facilitated follow-on meetings for the Instem team with those
businesses deemed interesting, with ongoing dialogue across a
number of potentially interesting opportunities. Surveys of
strategic and financial buyers are suggesting that acquisition
valuation multiples have reduced as a consequence of COVID-19,
which may help unlock some opportunities for Instem.
Market Review
The market backdrop continues to be favourable for the Company
given global population growth and life expectancy underpinning
increased demand for successful innovation in life sciences.
Increasing amounts are being invested in the biotech industry with
the pharmaceuticals sector investing heavily in drug
development.
In the pharmaceutical industry, which represents the largest
proportion of Instem's revenue, we refer again to the Pharma
R&D Annual Review, the 2020 version of which was released by
Pharma Intelligence in March this year. This report shows that the
industry grew strongly in the last 12 months with a 9.6% increase
(2019: 6%) in the total number of drugs in the regulatory stages of
global R&D, continuing a multi-year growth trend that, subject
to the potential impact of COVID-19, sees no sign of abating. Most
relevant to Instem is the 13.2% increase (2019: 6%) in the number
of drugs at the pre-clinical (or non-clinical) phase of drug
development, that accounts for much of our business.
With Instem's suite of products providing faster and more
cost-effective routes to market by enabling clients to analyse,
report and submit data to regulatory agencies, the Company
continues to benefit from growing demand for its products and
services. The regulatory-backed Standard for the Exchange of
Non-clinical Data ("S") market is estimated to be worth
approximately $50m in 2021 and Instem remains well placed to
continue to take a meaningful share of this growing market with
evolving regulation set to underpin the longer-term
opportunity.
November's acquisition of Leadscope provides further
regulatory-backed growth opportunities given that a number of the
world's major regulatory agencies, including the FDA and the
European Medicines Agency, adopted a standard known as ICH M7 (R1)
for the assessment and control of DNA reactive (mutagenic)
impurities in pharmaceuticals to limit potential carcinogenic
risk.
Importantly, Leadscope is especially well-placed for growth
having worked extensively through research collaboration agreements
("RCAs") with the FDA, and in collaboration with other agencies, to
develop both predictive and expert review solutions for ICH M7 (R1)
and has licensed the software widely in the industry.
Study Management
Instem's focus here is on automating processes associated with
pre-clinical and early phase clinical study planning, data
collection, analysis and reporting. The move of long-standing
clients to SaaS deployment continued during the period while the
addition of a number of new clients utilising the SaaS model
contributed strongly to the changing revenue mix with 28% of the
Company's study management business now aligned to this revenue
model. Importantly, the Company continues to work closely with its
clients as part of its carefully managed programme to transfer all
clients to a SaaS-dominated deployment model.
This area includes Instem's market leading Provantis product
suite, which enjoyed record new client wins with thirteen
additional customers, nine of whom chose SaaS deployment. Once
again, growth was particularly strong in the Asia-Pacific region,
with nine new Provantis clients.
Informatics
Instem utilises a range of bioinformatics tools to extract,
analyse and compile actionable information from across the R&D
spectrum. The growing use of AI, in particular across the Target
Safety Assessment ("TSA") process, has driven the majority of
growth in this area.
Revenue from the Company's informatics services grew rapidly
during the period with a 101% increase compared with the prior
period.
Added to the strong organic growth, Instem completed the
earnings enhancing acquisition of Leadscope Inc in November 2019,
further extending its product portfolio and cross-selling
opportunities. Provided on a subscription or pay-per-use basis,
Leadscope's software employs sophisticated artificial intelligence
and machine-learning algorithms to predict potential safety
outcomes and to enable scientists to perform expert reviews.
Deployed Software-as-a-Service, or on client premises, Leadscope's
software allows clients to extract knowledge from both public data
and their own proprietary sources.
Importantly, Informatics brings Instem into contact with
customers at an early stage in the drug development process,
helping to cement client relationships through its range of
solutions.
Regulatory Solutions
The Company continued to benefit from FDA-driven demand for S
conversion work, with the industry focused on addressing both the
study backlog and growing current study volume. Outsourced
services, whereby Instem leverages its technology to deliver fully
compliant S packages ready for electronic regulatory submission,
generated strong repeat business.
With over fifty revenue generating S services staff, Instem has
by far the largest team in the industry focused purely on S
outsourcing. The team comprises several of the world's leading S
experts, who continue to contribute to the industry consortium
developing and maintaining the standard. Instem has highly
qualified S staff in Europe and North America, close to the largest
client concentrations, but with around two thirds of the team in
Instem's Pune, India office, which in aggregate provides a very
cost effective and scalable approach. This has enabled Instem to
grow S outsourced services revenue to GBP4.5m in 2019 (2018:
GBP2.8m).
Industry consolidation by the two dominant non-clinical contract
research organisations ("CROs"), Charles River and Covance, who
each has a strategy to undertake S production in-house, is expected
to moderate growth in demand for S Services for regulatory
submission. However, with a significant volume of S data sets now
in existence, the opportunity to use S for data exploitation is
growing and we expect that area of Instem's solutions suite to
benefit.
Impairment of goodwill and other intangible assets
Although our Alphadas early phase clinical data collection
business performed well for the first few years following the May
2013 acquisition of Logos Technologies "Logos", that sector of the
pharmaceutical development market has been going through
considerable structural change, impacting many of the contract
research organisations that represent the majority of the market
opportunity. Consequently, little new data collection software
business has been placed in this sector over the last 18 months.
Furthermore, it appears the early phase clinical CROs have been
negatively impacted by COVID-19. We envisage further slippage in
the pipeline of new opportunities, with no certainty regarding the
timing of new business awards.
We have therefore made a combined GBP3.2m impairment provision
(2018: GBPnil) to the goodwill arising on the Logos acquisition
(GBP2.5m) and to other intangible assets related to our Alphadas
business (GBP0.7m). We remain committed to supporting our existing
Alphadas clients and to securing new business as suitable
opportunities arise. There is no impact from this to any other area
of our business, where end user markets remain robust.
Financial Review
Key Performance Indicators (KPIs)
The directors review monthly revenue and operating costs to
ensure that sufficient cash resources are available for the working
capital requirements of the Group. Primary KPIs at the year end
were:
12 mths to 12 mths to
31 Dec 2019 31 Dec 2018
GBP000 GBP000
Total Revenue 25,717 22,705
Recurring revenue 14,862 13,669
Recurring revenue as a percentage of total revenue 58% 60%
Adjusted EBITDA 4,864 4,052
Cash and cash equivalents 5,957 3,572
In addition, non-financial KPIs are periodically reviewed and
assessed, including customer retention and staff retention
rates.
Instem's revenue model consists of perpetual licence income with
annual support and maintenance contracts, professional fees,
technology enabled outsourced services fees and SaaS
subscriptions.
Total revenues increased by 13% to GBP25.7m (2018: GBP22.7m).
Recurring revenue, derived from support & maintenance contracts
and SaaS subscriptions, increased during the year by 9% to GBP14.9m
(2018: GBP13.7m). Recurring revenue as a percentage of total
revenue was 58% (2018: 60%). In absolute terms recurring revenue
increased over the prior year by GBP1.2m but its percentage of the
total decreased due to the growth in technology enabled outsourced
services, which is currently all shown as non-recurring. Revenue
from technology enabled outsourced services increased to GBP5.6m
(2018: GBP3.3m). Operating expenses increased by 12% in the period
reflecting the ongoing investment in operational teams. The revenue
mix also attracted higher direct costs linked to the higher
revenue.
Earnings before interest, tax, depreciation, amortisation,
impairment of goodwill and capitalised development and
non-recurring items (Adjusted EBITDA) increased by 20% to GBP4.9m
(2018: GBP4.1m). For this measure of earnings, the margin as a
percentage of revenue increased in the year to 18.9% from 17.8% in
2018.
Non-recurring costs in the year included GBP0.2m of acquisition
costs linked to the purchase of Leadscope Inc. and legal costs
associated with historical contract disputes of GBP0.1m (2018:
GBP0.05m).
The reported loss before tax for the year was GBP0.9m (2018:
profit of GBP1.7m). Adjusted profit before tax (i.e. adjusting for
the effect of foreign currency exchange on the revaluation of
inter-company balances included in finance income/(costs),
non-recurring items, impairment of goodwill and capitalised
development and amortisation of intangibles on acquisitions) was
GBP3.2m (2018: GBP2.8m).
The Group continues to maintain its investment in its product
portfolio. Development costs incurred during the year were GBP3.1m
(2018: GBP3.1m), of which GBP1.3m (2018: GBP1.5m) was capitalised.
The Group claimed research and development tax credits in respect
of the prior year 2018 of GBP0.6m (2018 in respect of 2017:
GBP0.5m).
The Group acquired Leadscope Inc on 15 November 2019. The
acquisition extends the Group's currently small but rapidly growing
Informatics business. The total consideration payable will be up to
$4.7m, satisfied by a combination of cash and new ordinary shares
in Instem plc. The consideration comprises an initial $3.35m, $0.1m
working capital adjustment payable in Q1 2020, $0.75m of deferred
consideration payable in two equal instalments in November 2020 and
November 2021 and up to a further $0.5m, contingent upon the future
financial performance of Leadscope, which would be payable in H1
2022. The initial consideration was satisfied in 2019 by $2.25m in
cash and $1.1m in new ordinary shares of 10 pence each equating to
231,966 shares. The cash was funded from existing resources.
In 2019 the Group has adopted new guidance for the recognition
of leases (note 7). The new standard has been applied using the
modified retrospective approach, with the cumulative effect of
adoption as at 1 January 2019 being recognised as a single
adjustment to retained earnings. IFRS16 removes the operating and
finance lease classification in IAS17 Leases and replaces them with
the concept of right of use assets and associated financial
liabilities. This change results in the recognition of a liability
on the statement of financial position for all leases which convey
a right to use the asset for the period of the contract. The lease
liability reflects the present value of the future rental payments
and interest, discounted using either the effective interest rate
or the incremental borrowing rate of the entity. In 2019 the right
of use assets recognised were primarily the leases for the
Company's global offices.
The change in accounting policy affected the following items in
the balance sheet on 1 January 2019:
-- Right of use assets - increase by GBP3.002m
-- Lease liabilities - increase by GBP3.042m
The net impact on retained earnings on 1 January 2019 was a
decrease of GBP0.068m. Prior periods have not been restated. For
the year ended 31 December 2019, the impact on adjusted EBITDA of
adopting IFRS16 is an increase of GBP0.7m. Amortisation of right of
use assets in the period amounted to GBP0.6m, with an interest
expense of GBP0.1m charged to finance costs.
Basic and diluted earnings per share calculated on an adjusted
basis were 19.3p and 18.4p respectively (2018: 16.4p basic and
15.5p diluted). The reported basic and diluted earnings per share
were (5.7p) and (5.7p) respectively (2018: 9.2p basic and 8.7p
diluted). The diluted loss per share in 2019 is the same as basic
loss per share as losses have an anti-dilutive effect.
The period saw strong net cash generated from operating
activities of GBP5.4m (2018: GBP2.2m), largely due to cash inflow
from key contracts, outsourced services, working capital management
and a GBP0.5m R&D tax credit claimed in respect of 2017. Cash
balance increased to GBP6.0m at 31 December 2019, compared with
GBP3.6m as at 31 December 2018, after making the initial cash
consideration for the acquisition of Leadscope Inc from existing
resources, net of cash acquired, of GBP1.3m in the period.
The Group's legacy defined benefit pension scheme has remained
closed to new members since October 2001. The most recent
comprehensive actuarial valuation was carried out at 5 April 2017
and the next triennial valuation will be calculated as at 5 April
2020 . At 31 December 2019, the pension deficit decreased by
GBP0.4m to GBP1.8m (2018: GBP2.2m). The future agreed cash
contributions will remain around an annual level of GBP0.5m payable
through to October 2024, by when the funding liability is scheduled
to be eliminated. The deficit at the year-end of GBP1.8m (2018:
GBP2.2m) is represented by the fair value of assets of GBP12.0m
(2018: GBP10.4m) and the present value of funded obligations of
GBP13.8m (2018: GBP12.6m), after applying a discount rate of 2.20%
(2018: 3.00%).
The table below provides the data for certain performance
measures mentioned above:
2019 2018
GBP000 GBP000
Annual support fees 8,418 8,160
SaaS subscription and support fees 6,444 5,509
Recurring revenue 14,862 13,669
Licence fees 3,501 3,491
Professional services 1,773 2,204
Technology enabled outsourced services 5,581 3,341
Total revenue 25,717 22,705
2019 2018
GBP000 GBP000
EBITDA 4,562 3,513
Non recurring costs (see note 3) 302 539
Adjusted EBITDA 4,864 4,052
(Loss)/Profit before tax (901) 1,677
Amortisation of intangibles arising on acquisition 523 788
Impairment of goodwill and capitalised development 3,175 -
Non recurring costs (see note 3) 302 539
Intercompany foreign exchange loss/(gain) 61 (186)
**Adjusted profit before tax 3,160 2,818
Tax (22) (207)
Adjusted profit after tax 3,138 2,611
Weighted average number of shares (000's) 17,053 16,849
Adjusted diluted earnings per share 18.4p 15.5p
Cash at bank 14,955 12,570
Bank overdraft (8,998) (8,998)
Cash balance 5,957 3,572
* Earnings before interest, tax, depreciation, amortisation,
impairment of goodwill and capitalised development and
non-recurring costs.
**After adjusting for the effect of foreign currency exchange on
the revaluation of inter-company balances included in finance
income/(costs), non-recurring items, impairment of goodwill and
capitalised development and amortisation of intangibles on
acquisitions.
Update on historical contract dispute
An historical contractual licence dispute, which does not affect
the ongoing operations of the Group, is in the process of being
heard by the German courts. The initial hearing was held in early
2019. An expert witness was appointed by the court to review the
case and report their findings. That report was submitted to the
court in January 2020 and the Company has commented in response.
The Company is defending the action and strongly believes that the
claim should be dismissed. Notwithstanding this, the cost provision
made in 2017 has been maintained in the 2019 financial statements.
Further announcements will be made as and when appropriate. To date
all legal expenses have been expensed.
Principal risks and uncertainties
The directors consider that the global pharmaceutical market is
likely to continue to provide growth opportunities for the
business. The combination of the high level of annual support
renewals and low levels of customer attrition provides revenue
visibility to underpin the Group strategy on product and market
development.
The Group seeks to mitigate exposure to all forms of risk
through a combination of regular performance review and a
comprehensive insurance programme.
v Foreign currency risk
The Group operates internationally and is exposed to foreign
currency risk on transactions denominated in a currency other than
the functional currency and on the translation of the statement of
financial position and statement of comprehensive income of foreign
operations into sterling. The main currency giving rise to this
risk is US dollars. The Group has both cash inflows and outflows in
this currency that create a natural hedge. The Group also generates
material cash reserves through its Chinese subsidiary that are not
readily available to the UK Group at short notice and, as such, the
Group has to maintain sufficient working capital headroom to
accommodate any delays in repatriating cash from China . In
managing currency risks the Group aims to reduce the impact of
short-term fluctuations on the Group's cash inflows and outflows in
a foreign currency. The Group continually assesses the most
appropriate approach to managing its currency exposure in line with
the overall goal of achieving predictable earnings growth. Over the
longer term, changes in foreign exchange could have an impact on
consolidation of foreign subsidiaries earnings. A 10% decrease in
the average value of Sterling against the US dollar would have
resulted in an increase in the Group's profit before tax by
approximately GBP0.1m (2018: GBP0.1m).
v Credit risk
Management aims to minimise the risk of credit losses.
The Group's financial assets are bank balances and cash and
trade and other receivables, which represent the Group's maximum
exposure to credit risk in relation to financial assets.
The Group's credit risk is primarily attributable to its trade
receivables and the Group has policies in place to ensure that
sales of products and services are made to customers with
appropriate creditworthiness. The Group generates external revenue
from no customers which individually amount to more than 10% of the
Group revenue. At the 2019 year end the Group had a maximum credit
risk exposure of GBP6.9m (2018: GBP7.8m).
The amounts presented in the statement of financial position are
net of impairment provisions.
The Group's exposure to losses from defaults on trade
receivables is reduced due to contractual terms which require
installation, training, annual licensing and support fees to be
invoiced and paid annually in advance.
v Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial commitments as they fall due. The Group manages
liquidity risk through regular cash flow forecasting and monitoring
through management review, including a regular review of working
capital and costs. The Group's principal costs are staff related,
that are primarily salaries and related benefits paid monthly. The
Group monitors daily its available headroom under its borrowing
facilities. At 31 December 2019, its GBP0.5m net overdraft bank
facility was undrawn (2018: GBP0.5m facility undrawn). This
facility is provided to the Group by the Group's UK based bankers,
with no other debt facilities in place in any other global
territories. The Group is focused on repatriating as much cash to
the UK as possible to minimise the use of the facility, whilst
ensuring there is sufficient working capital available in each
territory in which it operates. The Group had positive cash
reserves of GBP6.0m at the 2019 year end, in addition to the
GBP0.5m undrawn working capital facility, although GBP1.9m of the
cash was held in bank accounts in China, where it has been
traditionally harder to repatriate funds quickly. There are no long
term restrictions on the transfer of funds from the Group bank
accounts in China.
v Interest rate risk
The Group operates an interest rate policy designed to minimise
interest costs and reduce volatility in reported earnings. The
Group's bank facility does not allow the US Dollar cash balances to
generate interest therefore the Group transfers funds from the US
dollar account into the sterling account. Currency transfers have
been utilised to maximise the interest gains whilst minimising
foreign exchange risks. As at 31 December 2019, the indications are
that the UK bank base interest rate will not materially differ over
the next 12 months. On the basis of the net cash position at 31
December 2019 and assuming no other changes occur (such as material
changes in currency exchange rates) the change in interest rates
will not have a material impact on net interest
income/(expense).
v Cyber risk
The Group handles much data electronically and is therefore
extremely aware of the risks that a cyber-attack could have on its
business. It has robust standards in place for establishing and
maintaining systems and processes to ensure that the highest
standards of data protection are in place. This also applies to any
third party who is handling data on behalf of the Group and its
customers, such as third-party hosting providers.
v Technology risk
Due to the evolving nature of technology platforms there is a
risk of obsolescence. The Group monitors this risk and develops
strategic development plans to ensure it remains compliant with
technological advances.
v Acquisition risk
Any corporate acquisition has associated integration risk. In
respect of every acquisition the Group creates an integration plan
with assigned responsibilities to a team led by an appointed
project manager for delivering against an agreed timetable. This is
monitored closely throughout the integration process and any
deviations against the plan are flagged and actioned
accordingly.
v Recruitment and retention risk
As its people are the Group's major asset, it is critical to
ensure that it recruits the best staff possible and that these
individuals are rewarded and developed appropriately. The Group has
a global HR team that manages the process of ensuring the staff
benefit and reward packages are incentivising for both recruitment
and retention purposes. This includes benchmarking against peers
and industry norms and considering staff feedback through regular
performance review. During 2020 the Group will be implementing an
all-staff share scheme for the first time.
Brexit
The UK withdrew from the EU on 31 January 2020 and has entered a
transition period until the end of 2020. Trade negotiations with
the EU are planned for 2020 and whilst the outcome remains
uncertain, there is always the associated risk of adverse
implications for the business, including the impact on exchange
rate fluctuations. However, the Group has to its knowledge
experienced no negative impact on its business to date and does not
expect to do so in the future. Instem operates in a global market
with a multinational customer base and its revenues and costs
spread around the globe without over reliance on Europe or exposure
to it. The 2016 acquisition of Notocord in France provides the
Group with a presence in Europe that we expect to help mitigate any
impact that might arise from the Brexit outcome. The Group will
continue to monitor the progress of the UK/EU trade negotiations
and any potential implications for the business.
Coronavirus (COVID-19)
Like most businesses worldwide the Group is having to deal with
the impact of COVID-19, with its primary concern being for the
safety and wellbeing of its staff and their families. The Group has
the benefit of operating in a sector where significant worldwide
focus is on identifying vaccines and therapies for COVID-19, with a
number of our customers directly involved in this work. While the
Group expects some disruption to demand for its products and
services there is also expected to be some increases in customer
demand. Whilst approximately half of the Group's revenues are
generated from North America, the remaining revenues are spread
across the world and therefore there is no dependence on one
territory thus spreading the risk. The Group benefits from having
no supply chain or distribution network to rely on. The Group has
the added benefit of having systems and processes established to
enable its workforce to work effectively from home across all of
its sites worldwide.
The Group continues to follow and adhere to the advice of the
government authorities in each territory in which its staff are
based. The situation is being closely monitored with all
appropriate and proportionate measures taken wherever possible.
Outlook
We are delighted with our performance during the period, with
our proven business model generating improvements across all of our
key performance metrics. We have an established base from which to
grow, both organically and via acquisition, and have established
long-term relationships with our blue-chip client base.
Importantly, we are well positioned to add new clients and generate
increasing revenues from existing clients while our transition to a
SaaS model increases visibility.
Increased revenue predictability and high retention rates
provide a strong foundation from which the business can grow as it
builds on the momentum achieved during 2019. While some future
uncertainty inevitably remains, the majority of our revenue comes
from clients whose laboratories are regarded as "essential
businesses" and therefore remain active, with many working on
COVID-19 related vaccines and therapies.
Consequently, we have remained very busy, have good visibility
over a strong H1 2020 performance and continue to have confidence
in the longer term outlook for the business, supported by a strong
cash balance at the end of April 2020 of GBP8.3m. Our staff are
currently working effectively from home and are highly motivated by
the work that we are directly contributing to COVID-19 research and
development.
Phil Reason
Chief Executive
3 June 2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2019
Audited Audited
Note Year ended Year ended
31 December 2019 31 December 2018
GBP000 GBP000
REVENUE 2 25,717 22,705
Employee benefits expense (13,609) (12,436)
Other expenses (7,244) (6,217)
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS (ADJUSTED
EBITDA) 4,864 4,052
Depreciation (155) (144)
Amortisation of intangibles arising on acquisition (523) (788)
Amortisation of internally generated intangibles (755) (738)
Amortisation of right of use assets (607) -
Impairment of goodwill and capitalised development (3,175) -
(LOSS)/PROFIT BEFORE NON-RECURRING COSTS (351) 2,382
Non-recurring costs 3 (302) (539)
(LOSS)/PROFIT AFTER NON-RECURRING COSTS (653) 1,843
Finance income 4 7 33
Finance costs 5 (255) (199)
(LOSS)/PROFIT BEFORE TAXATION (901) 1,677
Taxation 6 (22) (207)
(LOSS)/PROFIT FOR THE YEAR (923) 1,470
OTHER COMPREHENSIVE INCOME/(EXPENSE)
Items that will not be reclassified to profit and loss account:
Actuarial gain on retirement benefit obligations 30 1,300
Deferred tax on actuarial gain (6) (221)
24 1,079
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations (208) (193)
_______ _______
OTHER COMPREHENSIVE (EXPENSE)/INCOME FOR THE YEAR (184) 886
_______ _______
TOTAL COMPREHENSIVE (EXPENSE)/INCOME FOR THE YEAR (1,107) 2,356
(LOSS)/PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY (923) 1,470
TOTAL COMPREHENSIVE (EXPENSE)/INCOME ATTRIBUTABLE TO OWNERS OF THE
PARENT COMPANY (1,107) 2,356
Earnings per share
Basic 7 (5.7p) 9.2p
Diluted 7 (5.7p) 8.7p
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2019
Audited Audited
2019 2018
GBP000 GBP000 GBP000 GBP000
ASSETS
NON-CURRENT ASSETS
Intangible assets 18,108 17,411
Property, plant and equipment 237 300
Right of use assets 2,165 -
Finance lease receivables 175 -
TOTAL NON-CURRENT ASSETS 20,685 17,711
CURRENT ASSETS
Inventories 36 37
Trade and other receivables 6,921 7,807
Finance lease receivables 39 -
Tax receivable 1,158 1,013
Cash and cash equivalents 5,957 3,572
TOTAL CURRENT ASSETS 14,111 12,429
TOTAL ASSETS 34,796 30,140
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 2,662 2,156
Deferred income 8,942 8,625
Tax payable 404 401
Financial liabilities 301 34
Lease liabilities 565 -
Deferred tax liabilities 506 12
TOTAL CURRENT LIABILITIES 13,380 11,228
NON-CURRENT LIABILITIES
Financial liabilities 559 18
Retirement benefit obligations 1,804 2,249
Provision for liabilities 250 250
Lease liabilities 2,004 -
TOTAL NON-CURRENT LIABILITIES 4,617 2,517
TOTAL LIABILITIES 17,997 13,745
EQUITY
Share capital 1,662 1,592
Share premium 13,135 12,535
Merger reserve 2,432 1,598
Share based payment reserve 654 1,010
Translation reserve 82 290
Retained earnings (1,166) (630)
TOTAL EQUITY ATTRIBUTABLE TO
OWNERS OF THE PARENT 16,799 16,395
TOTAL EQUITY AND LIABILITIES 34,746 30,140
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2019
Audited Audited
2019 2018
GBP000 GBP000 GBP000 GBP000
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss)/profit before taxation (901) 1,677
Adjustments for:
Depreciation 155 144
Amortisation of intangibles 1,278 1,526
Amortisation of right of use assets 607 -
Impairment of goodwill and capitalised 3,175 -
development
Share based payment charge 75 216
Retirement benefit obligations (475) (499)
Finance income (7) (33)
Finance costs 255 199
CASH FLOWS FROM OPERATIONS BEFORE
MOVEMENTS IN WORKING CAPITAL 4,162 3,230
Movements in working capital:
Decrease/(Increase) in inventories 1 (7)
Decrease in trade and other receivables 790 1,997
Increase/(Decrease) in trade, other payables and
deferred income 693 (3,448)
NET CASH GENERATED FROM OPERATIONS 5,646 1,772
Finance income 7 33
Finance costs (255) (11)
Income taxes 25 408
NET CASH GENERATED FROM OPERATING ACTIVITIES 5,423 2,202
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalisation of development costs (1,344) (1,490)
Purchase of property, plant and equipment (91) (145)
Payment of contingent consideration - (200)
Purchase of subsidiary undertakings (net of (1,268) -
cash acquired)
NET CASH USED IN INVESTING ACTIVITIES (2,703) (1,835)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital 648 50
Lease interest payment (2) (4)
Repayment of lease liabilities (693) -
Receipts from sublease of asset 7 -
Repayment of lease capital (34) (31)
NET CASH GENERATED FROM FINANCING ACTIVITIES (74) 15
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,646 382
Cash and cash equivalents at start of year 3,572 3,064
Effects of exchange rate changes on the
balance of cash held in foreign currencies (261) 126
CASH AND CASH EQUIVALENTS AT OF YEAR 5,957 3,572
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Shares
based
Share Share Merger payment Translation Retained Total
capital premium reserve reserve reserve earnings equity
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Balance as at
1 January 2018
- Audited 1,589 12,488 1,598 794 483 (3,179) 13,773
Profit for the
year - - - - - 1,470 1,470
Other comprehensive
(expense)/income
for the year - - - - (193) 1,079 886
_______ _______ _______ _______ _______ _______ _______
Total comprehensive
(expense)/income - - - - (193) 2,549 2,356
Shares issued 3 47 - - - - 50
Share based
payment - - - 216 - - 216
Balance at 31
December 2018
- Audited 1,592 12,535 1,598 1,010 290 (630) 16,395
Adjustment on
initial application
of IFRS 16 - - - - - (68) (68)
Adjusted balance
as at 1 January
2019 - Audited 1,592 12,535 1,598 1,010 290 (698) 16,327
Profit for the
year - - - - - (923) (923)
Other comprehensive
income/(expense)
for the year - - - - (208) 24 (184)
Total comprehensive
(expense)/income - - - - (208) (899) (1,107)
Shares issued 70 600 834 - - - 1,504
Share based payment - - - 75 - - 75
Reserve transfer
on exercise of
share options - - - (431) - 431 -
Balance as at
31 December 2019
- Audited 1,662 13,135 2,432 654 82 (1,166) 16,799
NOTES TO THE FINANCIAL STATEMENTS
1 Basis of preparation
GENERAL INFORMATION
The principal activity and nature of operations of the Group is
the provision of world class IT solutions to the life sciences
market. Instem's solutions for data collection, management and
analysis are used by customers worldwide to meet the needs of life
science and healthcare organisations for data-driven decision
making leading to safer, more effective products. Instem plc is a
public limited company, listed on AIM, and incorporated in England
and Wales under the Companies Act 2006 and domiciled in England and
Wales. The registered office is Diamond Way, Stone Business Park,
Stone, Staffordshire, ST15 0SD.
STATEMENT OF COMPLIANCE
The financial information set out in this preliminary
announcement does not constitute the Group's statutory financial
statements for the years ended 31 December 2019 or 2018 as defined
in section 435 of the Companies act 2006 (CA 2006) but is derived
from those audited financial statements. Statutory financial
statements for 2018 have been delivered to the Registrar of
Companies and those for 2019 will be delivered in due course. The
auditors reported on those accounts; their reports were unqualified
and did not contain a statement under either Section 498(2) or
Section 498(3) of the Companies Act 2006. For the year ended 31
December 2019 their report contains a material uncertainty in
respect of going concern to which the auditor drew attention by way
of emphasis without modifying their report.
ANNUAL REPORT AND FINANCIAL STATEMENTS
Copies of the Annual Report and Financial Statements and Notice
of Annual General Meeting ("AGM") will be posted to the Group's
shareholders on Friday 5 June 2020 and will be made available,
along with this announcement, to view from that date on Instem's
website at https://investors.instem.com .
The AGM is to be held at 2.00pm on Tuesday 30 June 2020 at the
Company's registered office, 2 Diamond Way, Stone Business Park,
Stone, Staffordshire, ST15 0SD.
In light of measures adopted by the UK Government to protect
public health in response to the Covid-19 pandemic, and in line
with guidance issued by The Chartered Governance Institute (ICSA),
the board of directors of the Company are of the view that
attendance at the AGM by a shareholder, other than for the specific
purpose of ensuring that the AGM is quorate, is not essential for
work purposes.
The AGM will therefore be convened with the minimum necessary
quorum (which will be fulfilled by directors of the Company).
Shareholders must not attend the AGM in person and anyone that
seeks to attend the AGM will be refused entry. The business of the
AGM will be restricted to the purposes set out in the formal Notice
of AGM. There will be no additional presentations or opportunities
for the board of directors to answer questions.
These steps are being taken to promote the health and wellbeing
of the Company's shareholders and employees, but it remains
important to the board of directors that your votes are counted at
the AGM. All shareholders are therefore strongly encouraged to
submit their votes on the formal business to be transacted using
the proxy form enclosed with the Notice of AGM.
The chairman of the AGM will propose that each resolution, as
set out in the Notice of AGM, is voted on via a poll. This means
that each shareholder present in person (which shall only be such
number of directors as is sufficient to ensure that the AGM is
quorate) or by proxy will have one vote for each share held.
The Company will continue to monitor developments relating to
Covid-19. If a situation should arise which necessitates that the
arrangements for the AGM be altered, shareholders will be notified
promptly via an RNS announcement and the Company's website.
In normal circumstances, the Company's AGM plays an important
role in providing an opportunity for the Company's directors to
engage with shareholders. The board of directors would therefore
like to thank all shareholders in advance for their cooperation
with and understanding of the alternative arrangements that the
Company has been required to implement this year.
FORWARD-LOOKING STATEMENTS
These results were approved by the Board of Directors and
authorised for issue on 2 June 2020. This document contains certain
forward-looking statements which reflect the knowledge and
information available to the Company during the preparation and up
to the publication of this document. By their very nature, these
statements depend upon circumstances and relate to events that may
occur in the future thereby involving a degree of uncertainty.
Therefore, nothing in this document should be construed as a profit
forecast by the Company.
BASIS OF ACCOUNTING
While the financial information included in this preliminary
announcement has been prepared in in accordance with International
Financial Reporting Standards (IFRS's), as adopted for use in the
European Union, IFRS Interpretation Committee (IFRIC)
interpretations, issued by the International Accounting Standards
Board (IASB), and the Companies Act 2006, this announcement does
not in itself contain sufficient information to comply with
IFRSs.
The Group's accounting reference date is 31 December.
IFRSs ADOPTED IN THE YEAR
The following IFRSs, IASs and IFRICs have been adopted for the
first time in the year:
The Group has adopted IFRS 16 Leases from 1 January 2019 using
the modified retrospective approach and has not restated
comparatives for the 2018 reporting period as permitted under the
specific transition provisions in the standard.
On adoption of IFRS 16, the Group recognised lease liabilities
on the statement of financial position in relation to leases which
had previously been classified as 'operating leases' under the
principles of IAS 17 Leases. These liabilities were measured at the
present value of the remaining lease payments, discounted using the
lessee's incremental borrowing rate as of 1 January 2019. The
weighted average lessee's incremental borrowing rate applied to the
lease liabilities on 1 January 2019 was 4.0%. For longer leases of
over 5 years a discount rate of 5% has been applied. Any prepaid or
accrued lease payments relating to leases recognised in the
statement of financial position as at 31 December 2018 have been
adjusted against the value of right of use assets as at the 1
January 2019.
Instead of recognising an operating expense for its operating
lease payments, the Group now instead recognises interest on its
lease liabilities and amortisation on its right of use assets.
Right of use assets increased by GBP3,002,000 on 1 January 2019,
comprising land & buildings of GBP2,978,000 and motor vehicles
of GBP24,000. Lease liabilities for land & buildings on 1
January 2019 are GBP3,020,000 and motor vehicles GBP22,000. The net
impact on retained earnings on 1 January 2019 was a decrease of
GBP68,000.
In applying the modified retrospective approach, the Group has
taken advantage of the following practical expedients:
-- A single discount rate has been applied to portfolios of leases with reasonably similar characteristics.
-- Impairment losses on right of use assets as at 1 January 2019
have been measured by reference to the amount of any onerous lease
provision recognised on 31 December 2018.
-- Leases with a remaining term of 12 months or less from the
date of initial application have not been recognised on the
statement of financial position with payments instead recognised as
an expense over the lease term on a straight-line basis,
-- The Group has not reassessed whether contracts are, or
contain, a lease as at the date of initial application. The Group
has therefore not applied the requirements of IFRS 16 to contracts
that were not previously identified as containing a lease under IAS
17 and IFRIC 4.
-- For the purposes of measuring the right of use asset
hindsight has been used. Therefore, it has been measured based on
prevailing estimates at the date of initial application and not
retrospectively.
Management have concluded that the interest rate implicit in the
leases cannot not be readily determined therefore the leases held
have been discounted by the incremental borrowing rate (IBR), being
the rate of interest that the Group would have to pay to borrow
over a similar term, and with a similar security, the funds
necessary to obtain assets of a similar value to the right of use
assets in a similar economic environment.
KEY ACCOUNTING POLICIES
BUSINESS COMBINATIONS
Acquisitions of businesses are accounted for using the
acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the
sum of the acquisition date fair values of the assets transferred
by the Group, liabilities incurred by the Group to the former
owners of the acquiree and the equity interests issued by the Group
in exchange for control of the acquiree. Acquisition related costs
are recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and
the liabilities assumed are recognised at their fair value, except
that deferred tax assets or liabilities are recognised and measured
in accordance with IAS 12 'Income taxes'.
Consideration may consist of deferred consideration and
contingent consideration. Deferred consideration is not based on
any performance related conditions and is payable on an agreed
future date. Contingent consideration is based on certain
performance related conditions and payable on an agreed future
date, if those conditions are met.
Deferred consideration and contingent consideration is measured
at their acquisition-date fair value and are taken into account in
the determination of goodwill. Changes in the fair value of the
contingent consideration that qualify as measurement period
adjustments are adjusted retrospectively, with corresponding
adjustments against goodwill. The subsequent accounting for changes
in the fair value of the contingent consideration that do not
qualify as measurement period adjustments depends on how the
contingent consideration is classified. Contingent consideration
that is classified as an asset or a liability is re-measured at
subsequent reporting dates with the corresponding gain or loss
being recognised in statement of comprehensive income.
GOING CONCERN
The financial position of the Group, its cash flows and
liquidity position are set out in the primary statements within
these financial statements.
The Group's financing arrangements consist of a committed net
overdraft facility of GBP0.5m with NatWest Bank plc to support the
Group's working capital needs. At 31 December 2019 the facility was
undrawn (2018: undrawn). There are no material covenants associated
with the facility.
In November 2019 the Company acquired the earnings enhancing,
cash generative business of Leadscope Inc, the results of which are
included in the Group's forecast cash flows for 2020 and beyond.
The only financial obligation associated with this acquisition
during 2020 is a deferred consideration payment of $0.4m due in
November 2020.
The Group's detailed forecasts and projections, taking account
of reasonably possible changes in trading performance through
sensitivity analysis, show that the Group has adequate resources to
be able it to continue in operation for at least twelve months from
the approval date of these Consolidated Financial Statements.
Accordingly, the Group continues to adopt the going concern basis
in preparing its Consolidated Financial Statements.
The uncertainty as to the future impact on the Group of the
recent COVID-19 outbreak has been considered as part of the Group's
adoption of the going concern basis. Thus far we have not observed
any material impact on our overall existing business or in the
level of new business opportunities that are being presented to us
in the markets in which we operate. We have seen a little slippage
in customers placing new business during the first quarter of 2020,
but at this stage it is too early to determine whether this is
likely to be a long term issue or merely a temporary matter whilst
our customers are focused on managing their own businesses, with
changes from introducing staff self-isolation and working from
home.
The Group has a significant proportion of recurring revenue
(circa 60% of total) from annual support & maintenance and SaaS
contracts from a well-established global customer base. Experience
from the last financial crisis showed there was no material
increase in recurring revenue attrition, although annual
inflationary increases were harder to secure. Revenue is supported
by a largely fixed cost base comprising staff and offices.
The Group had net current assets (excluding deferred income) of
GBP10.0m at 31 December 2019 (2018: GBP9.8m). The deferred income
recurs each year on renewal of contracts and in general the Group
has either received the related cash or has raised invoices for the
services. The Group had positive cash reserves of GBP6.0m at the
2019 year end, in addition to the GBP0.5m undrawn working capital
facility, although GBP1.9m of the cash was held in bank accounts in
China, where it has been traditionally harder to repatriate funds
quickly. There are however no long term restrictions on the
transfer of funds from the Group bank accounts in China.
In the downside scenario analysis performed, the Board has
considered the potential impact of the COVID-19 outbreak on the
Group's results. In preparing this analysis the following key
assumptions were used: the impact of a 25% loss of new business for
the next twelve months, no hiring of new staff for twelve months
and a weakening of the USD against GBP. This resulted in reduced
profitability and cash over the next twelve months but the Company
remained viable. We then considered a more extreme situation, if
the significant negative impact of COVID-19 continued for an
extended period of time into 2021. We assumed there would be no new
business. and up to 25% erosion of the existing customer base for
recurring revenues. This would result in the Company exhausting its
cash reserves and exceeding its bank facility in November 2020.
The Company would take remedial action to counter the dramatic
reduction in profit and cash through a cost cutting and
fund-raising exercise that would include staff redundancies,
general cost control measures, office space reduction and seeking
alternative sources of funding from banks and investors.
These downside scenarios are considered unlikely. However, it is
difficult to predict the overall impact and outcome of COVID-19 at
this stage, particularly if there was a second wave towards the end
of 2020. The Board acknowledges that based on the difficulty in
determining when sufficient relief funding may become available and
when the full benefit of cost cutting measures is realised there is
material uncertainty in the Group's future as a result of a
long-term negative impact of the COVID-19 pandemic.
The directors have concluded that current circumstances
represent a material uncertainty that may cast significant doubt
upon the company's ability to continue as a going concern and,
therefore, that it may be unable to realise its assets and
discharge its liabilities in the ordinary course of business.
Nevertheless after making enquiries, and considering the
uncertainties described above, the directors have a reasonable
expectation that the company has adequate resources to continue in
operational existence for the foreseeable future. For these
reasons, they continue to adopt the going concern basis in
preparing the annual report and accounts.
SIGNIFICANT JUDGEMENTS AND ESTIMATES
In the process of applying the Group's accounting policies,
which are described above, management have made judgements and
estimations about the future that have the most significant effect
on the amounts recognised in the financial statements. The
estimates and underlying assumptions are reviewed on an on-going
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 revision and future periods if
the revision affects both current and future periods.
Significant judgements
The following judgments have the most significant effect on the
financial statements.
Revenue Recognition
The Group generates revenue from the provision of software
licences, annual support, SaaS subscriptions, professional services
and technology enabled outsourced services. Judgement is applied in
determining how
many performance obligations there are within each contract and
the period in which these obligations will be fulfilled and
recognised as revenue, based on the Group's accounting
policies.
Estimation uncertainty
Information about estimations and assumptions that may have the
most significant affect on recognition and measurement of assets,
liabilities, income and expenses is provided below. Actual results
may be substantially different.
Provision for liabilities
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle the probable
outflow of resources, and a reliable estimate can be made of the
amount of the obligation. As at 31 December 2019, the Group has a
provision of GBP0.25m (2018: GBP0.25m) in respect of historical
contract disputes as the directors have considered that the above
provision conditions have been met. The provision represents the
best estimate of the risks and considers all information and legal
input received by the Group.
Impairment of goodwill
The carrying value of goodwill must be assessed for impairment
annually. This requires a value in use estimate which is dependant
on estimation of future cashflows and the use of an appropriate
discount rate to discount those cash flows to their present value.
The carrying value of goodwill as at 31 December 2019 is
GBP9,864,000 (2018: GBP10,590,000). There was an impairment charge
of GBP2,482,000 during the year.
Impairment of other intangible assets
Other intangibles assets consist of assets acquired (customer
relationships, intellectual property and brand names) as part of
the net assets of certain subsidiaries and software, being mainly
capitalised development costs. Impairment testing requires a value
in use estimate which is dependant on an estimation of future
cashflows and the use of an appropriate discount rate to discount
those cash flows to their present value. The carrying amounts of
acquired intangibles and software at the reporting date was
GBP4,241,000 and GBP3,692,000 respectively (2018: GBP2,934,000 and
GBP3,887,000). There was an impairment charge of GBP693,000 during
the year.
Leases - Incremental borrowing rate
Management have concluded that that the interest rate implicit
in the leases cannot not be readily determined therefore the leases
held have been discounted by the incremental borrowing rate (IBR),
being the rate of interest that the Group would have to pay to
borrow over a similar term, and with a similar security, the funds
necessary to obtain assets of a similar value to the right of use
assets in a similar economic environment. To determine the IBR,
management approached a number of banks and has used the lending
rate and margin offered of 4.00%, being a lending rate of 0.75%
(base rate at 31 December 2019) and margin of 3.25%. For longer
leases of over 5 years management considers a discount rate of 5%
to be a more accurate reflection.
2 Segmental reporting
In prior years, the Group reported its business as one operating
segment; Global Life Sciences. The Board managed the Group by
monitoring its revenue streams and considered the cost base as a
whole. Historically the Group's finance systems have recorded costs
centrally and have managed costs in this way. Without systems
capable of allocating costs accurately, the Board concluded that
there was only one operating segment in which revenues and costs
were reported. Over recent years the Group has expanded both
organically and through acquisition, increasing the number of
products and services. During 2019 the business was divided into
three operating segments to better manage and report revenues;
Study Management, Regulatory Solutions and Informatics.
There has been an ongoing project to enhance the quality of
management information (MI) following the implementation of a new
finance system. During the final quarter of 2019 certain direct
costs were allocated to the revenue streams whilst the majority of
costs were still recorded and reported centrally. The treatment in
2019 is a new disclosure based on information that was provided to
the Instem Board, the Company's Chief Operating Decision Maker, at
the end of the year.
Whilst the expectation in future years is to allocate more
centrally held operational costs to the individual segments, it
will take time for the allocations to be sufficiently accurate for
the Board to use segmental cost information for meaningful decision
making.
The operations of the Group are managed centrally with
group-wide functions including sales and marketing, development,
customer support, human resources and finance & administration
.
The analysis provided below reflects costs directly attributable
to the respective segments in 2019, which are primarily third party
costs of sale and costs of allocated employees. The remaining
indirect operational costs are accounted for centrally and are not
allocated to specific segments.
There are no comparative cost numbers shown for 2018 as data was
not recorded in this way and so numbers were not available. Set out
below is a split of revenue in 2018 between the three business
segments identified in 2019. This information is provided to aid
comparability not as a restatement of prior year disclosures.
SEGMENTAL REPORTING Study Management Regulatory Audited
2019 Solutions Informatics Total
GBP000 GBP000 GBP000 GBP000
Total revenue 15,188 9,037 1,492 25,717
Direct attributable costs (4,370) (2,111) (660) (7,141)
______ ______ ______ ______
Contribution to indirect
overheads 10,818 6,926 832 18,576
Central unallocated indirect
costs (13,712)
______
Adjusted EBITDA 4,864
Depreciation (155)
Amortisation of intangibles
arising on acquisition (523)
Amortisation of internally
generated intangibles (755)
Amortisation of right of
use assets (607)
Impairment of goodwill and
capitalised development (3,175)
______
LOSS BEFORE NON-RECURRING
COSTS (351)
Non-recurring costs (302)
______
LOSS AFTER NON-RECURRING
COSTS (653)
Finance income 7
Finance costs (255)
______
LOSS BEFORE TAXATION (901)
SEGMENTAL REPORTING Study Management Regulatory Audited
2018 Solutions Informatics Total
GBP000 GBP000 GBP000 GBP000
Total revenue 14,451 7,513 741 22,705
Central unallocated indirect
costs (18,653)
______
Adjusted EBITDA 4,052
Depreciation (144)
Amortisation of intangibles
arising on acquisition (788)
Amortisation of internally
generated intangibles (738)
______
PROFIT BEFORE NON-RECURRING
COSTS 2,382
Non-recurring costs (539)
______
PROFIT AFTER NON-RECURRING
COSTS 1,843
Finance income 33
Finance costs (199)
______
PROFIT BEFORE TAXATION 1,677
Audited Audited
2019 2018
REVENUE BY PRODUCT TYPE GBP000 GBP000
Licence fees 3,501 3,491
Annual support fees 8,418 8,160
SaaS subscription and support fees 6,444 5,509
Professional services 1,773 2,204
Technology enabled outsourced services 5,581 3,341
______ _______
25,717 22,705
Audited Audited
2019 2018
REVENUE BY GEOGRAPHICAL LOCATION GBP000 GBP000
UK 3,414 3,504
Rest of Europe 5,051 4,534
USA and Canada 12,701 11,507
Rest of World 4,551 3,160
______ ______
25,717 22,705
Audited Audited
NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION 2019 2018
BY GEOGRAPHICAL LOCATION GBP000 GBP000
UK 17,779 16,896
Rest of Europe 1,107 624
USA and Canada 432 133
Rest of World 881 58
______ ______
20,199 17,711
There were no customers which represented more than 10% of the
Group revenue in 2019 (2018: none).
3 Non recurring costs
Audited Audited
2019 2018
GBP000 GBP000
Professional fees - 364
Guaranteed Minimum Pension (GMP) equalisation provision
Legal costs relating to historical contract disputes - 126
Acquisition costs 106 49
196 -
302 539
Acquisition costs incurred in the period relate to the purchase
of Leadscope Inc. on 15 November 2019. The costs incurred were
directly linked to the acquisition and consisted of legal,
accounting and commercial advice.
4 Finance income
Audited Audited
2019 2018
GBP000 GBP000
Foreign exchange gains - 25
Other interest 7 8
7 33
5 Finance costs
Audited Audited 2018
2019 GBP000
GBP000
Bank loans and overdrafts 34 11
Unwinding discount on deferred consideration - 12
Net interest charge on pension scheme 60 172
Lease interest cost 2 4
Right of use asset interest cost 118 -
Foreign exchange losses 41 -
255 199
6 Taxation
Income taxes recognised in profit or loss: Audited Audited
2019 2018
GBP000 GBP000
Current tax:
UK corporation tax on profit of the year - -
UK corporation tax in respect of previous
years 28 (85)
Adjustments in respect of R&D tax credit 464 477
Foreign tax (404) (403)
Foreign tax in respect of previous years 67 (12)
_______ _______
Total current tax credit/(charge) 155 (23)
_______ _______
Deferred tax:
Current year charge (96) (67)
Adjustment in respect of previous years (11) (83)
Retirement benefit obligation (70) (34)
_______ _______
Total deferred tax charge (177) (184)
_______ _______
Total income tax charge recognised in the
current year (22) (207)
7 Leases
Nature of leasing activities in the capacity of lessee
The Group leases a number of offices in the jurisdictions from
which it operates. In these jurisdictions the periodic rent is
fixed over the lease term, with inflationary increases incorporated
into the fixed payments stipulated in the lease agreements. Where
rental agreements include market rate escalations, the lease
liability is re-measured when the change in cash payments takes
effect. The Group also leases certain vehicles. Leases of vehicles
comprise only fixed payments over the lease terms. With the
exception of short term leases, leases of low value underlying
assets, leases held by the newly acquired Leadscope Inc and a lease
held for a telephone system, with less than twelve months remaining
on the lease as at 31 December 2019, each lease is reflected on the
balance sheet as a right of use asset and a lease liability.
Each lease generally imposes a restriction that, unless there is
a contractual right for the Group to sublet the asset to another
party, the right of use asset can only be used by the Group. Leases
are either non cancellable or may only be cancelled by incurring a
termination fee. Some leases contain an option to extend the lease
for a further term. For office leases the Group must keep those
properties in a good state of repair and return the properties in
their original condition at the end of the lease.
The table below describes the nature of the Groups leasing
activities by type of right of use asset recognised on
the balance sheet:
No of No of No of leases No of
No of right leases leases with leases
of use Range with with options payments with
Right of assets of remaining extension to purchase linked termination
use assets leased term options to an index options
Office
buildings 9 3.5 years 9 0 1 0
Vehicles 2 0.4 years 0 0 0 0
The aggregate lease liability recognised in the statement of
financial position at 1 January 2019 and the Group's operating
lease commitment at 31 December 2018 can be reconciled as
follows:
2019
GBP000
Operating lease commitment as at 31
December 2018 3,363
Effect of foreign exchange on brought
forward balance (104)
Effect of discounting those lease commitments (358)
Recognition of variable lease payments 83
Effect of electing to account for short-term
and low value leases off statement of
financial position (6)
Effect of lease extended during 2019 24
At 1 January 2019 3,002
Land & Motor
Right of use assets buildings vehicles Total
GBP000 GBP000 GBP000
As at 1 January 2019 2,978 24 3,002
Derecognition of sublease (249) - (249)
Amortisation (590) (17) (607)
Exchange adjustment 19 - 19
As at 31 December 2019 2,158 7 2,165
Lease liabilities
Land & Motor
buildings vehicles
Total
GBP000 GBP000 GBP000
As at 1 January 2019 3,020 22 3,042
Interest expense 117 1 118
Lease payments (676) (17) (693)
Exchange adjustment 102 - 102
As at 31 December 2019 2,563 6 2,569
Lease liability maturity analysis:
As at 31 December 2019
1 year or After five
less 2 to 5 years years Total
GBP000 GBP000 GBP000 GBP000
Lease liabilities 565 1,950 54 2,569
The following amounts in respect of leases, where the company is
a lessee, have been recognised in consolidated statement of
comprehensive income:
2019
GBP000
Expenses relating to short-term
leases 21
Low value lease expense 7
Interest expense 118
Amortisation of right of use assets 607
The total cash outflow for leases in 2019 was GBP0.7m.
8 Earnings per share
Basic and diluted earnings per share
Basic earnings per share are calculated by dividing the profit
attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the year. Diluted
earnings per share is calculated by adjusting the weighted number
of ordinary shares outstanding to assume conversion of all dilutive
potential shares arising from the share option scheme. The dilutive
impact of the share options is calculated by determining the number
of shares that could have been acquired at fair value (determined
as the average market share price of the Company's shares) based on
the monetary value of the subscription rights attached to the
outstanding share options. The diluted loss per share in 2019 is
the same as basic loss per share as losses have an anti-dilutive
effect.
Audited Audited
2019 2018
Loss after Weighted Loss per share Profit after Weighted Earnings per
tax average number tax average number share
of shares of shares
'000 Pence '000
GBP000 GBP000 Pence
Earnings per
share - Basic (923) 16,254 (5.7) 1,470 15,909 9.2
Potentially
dilutive
shares - 799 - - 940 -
_______ _______ _______ _______ _______ _______
Earnings per
share -
Diluted (923) 17,053 (5.7) 1,470 16,849 8.7
_______ _______ _______ _______ _______ _______
Adjusted earnings per share
Adjusted earnings per share is calculated after adjusting for
the effect of foreign currency exchange on the revaluation of
inter-group balances included in finance income/(costs),
non-recurring items, impairment of goodwill and capitalised
development and amortisation of intangibles on acquisitions.
Diluted adjusted earnings per share is calculated by adjusting the
weighted number of ordinary shares outstanding to assume conversion
of all dilutive potential shares arising from the share option
scheme. The dilutive impact of the share options is calculated by
determining the number of shares that could have been acquired at
fair value (determined as the average market share price of the
Company's shares) based on the monetary value of the subscription
rights attached to the outstanding share options.
Audited Audited
2019 2018
Adjusted Weighted Adjusted Adjusted Weighted Adjusted
Profit after average Earnings per Profit after average Earnings per
tax number of share tax number of share
shares shares
GBP000 '000 Pence GBP000 '000 Pence
Earnings per
share -
Basic 3,138 16,254 19.3 2,611 15,909 16.4
Potentially
dilutive
shares - 799 - - 940 -
_______ _______ _______ _______ _______ _______
Earnings per
share -
Diluted 3,138 17,053 18.4 2,611 16,849 15.5
_______ _______ _______ _______ _______ _______
Audited Audited
2019 2018
GBP000 GBP000
Reconciliation of adjusted
profit before tax:
Reported (loss)/profit
before tax (901) 1,677
Non-recurring costs 302 539
Amortisation of acquired
intangibles 523 788
Impairment of goodwill 3,175 -
and capitalised development
Foreign exchange differences
on revaluation of inter-group
balances 61 (186)
______ ______
Adjusted profit before
tax 3,160 2,818
Tax (22) (207)
______ ______
Adjusted profit after
tax 3,138 2,611
_____ _____
9 Subsequent events
No adjusting events have occurred between the 31 December
reporting date and the date of approval of these financial
statements.
On 13th February 2020 it was announced that a member of the
senior management team had exercised share options over 50,714
ordinary shares of 10p each in the Company.
In January 2020 the Group informed its staff of its intention to
implement an all-staff share and option scheme. The scheme has
subsequently been formally launched with staff receiving the right
to 386,686 ordinary shares of 10p each in the Company that will
vest in April 2023.
Like most businesses worldwide the Group is having to deal with
the impact of COVID-19, with its primary concern being for the
safety and wellbeing of its staff and their families. While the
Group expects some disruption to demand for its products and
services there is also expected to be some increases in customer
demand.
The uncertainty as to the future impact on the Group of the
recent COVID-19 outbreak has been considered as part of the Group's
adoption of the going concern basis. Thus far we have not observed
any material impact on our overall existing business or in the
level of new business opportunities that are being presented to us
in the markets in which we operate. We have seen a little slippage
in customers placing new business during the first quarter of 2020,
but at this stage it is too early to determine whether this is
likely to be a long term issue or merely a temporary matter whilst
our customers are focused on managing their own businesses, with
changes from introducing staff self-isolation and working from
home.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SSMFAEESSEDM
(END) Dow Jones Newswires
June 03, 2020 02:00 ET (06:00 GMT)
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