TIDMINS
RNS Number : 0600V
Instem plc
12 April 2021
Instem plc
("Instem" or "the Company")
Audited Results for the Year Ended 31 December 2020 &
Investor Presentation
Instem plc (AIM: INS), a leading provider of IT solutions to the
global life sciences market, announces its audited results for the
year ended 31 December 2020 (the "Period").
Financial Highlight:
-- Revenues increased 10% to GBP28.2m (2019: GBP25.7m)
o Software as a Service (SaaS) revenues increased by 25% to
GBP8.0m (2019: GBP6.4m)
o Recurring revenues (annual support and SaaS) increased 13% to
GBP16.9m (2019: GBP14.9m)
o Organic revenue growth (excluding Leadscope acquisition in
November 2019) of 3% to GBP26.3m (2019: GBP25.5m)
-- Adjusted EBITDA* of GBP5.9m (2019: GBP4.9m)
-- Reported profit before tax of GBP2.5m (2019: loss of GBP0.9m)
-- Adjusted profit before tax** of GBP4.0m (2019: GBP3.2m)
-- Fully diluted earnings per share of 11.6p (2019: 5.7p loss per share)
-- Adjusted fully diluted earnings per share** of 19.1p (2019: 18.4p)
-- Cash balance as at 31 December 2020 of GBP26.7m (2019:
GBP6.0m) - reflecting both very strong operating cash generation
and the oversubscribed placing in July 2020
*Earnings before interest, tax, depreciation, amortisation ,
impairment of goodwill and capitalised development costs plus
non-recurring items.
**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 plus amortisation of intangibles on
acquisitions.
Operational Highlights
-- Strong performance despite wider market impact of COVID-19
-- Placing raising GBP15m net of expenses for the Group to accelerate its acquisition strategy
-- Continued transition to SaaS deployment, increasing recurring revenue
-- New business revenue came from a balanced blend of new and existing clients
-- Further expansion of footprint in the Asia-Pacific region
Post Period-End Highlights
-- Completed the acquisitions of The Edge Software Consultancy
("The Edge") and d-Wise Technologies Inc ("d-wise")
o Extending the Group's reach across the drug discovery and
development lifecycle
o Increasing recurring revenues
o Strengthening relationships with existing clients
-- Current cash position of circa GBP14m following payment of
initial acquisition consideration
-- Deferred and contingent consideration payable of up to approx. GBP11.1m
Analyst Presentation: 11:00 today
Management will be hosting a presentation via web conference
today at 11:00. Analysts wishing to join should
register their interest by emailing instem@walbrookpr.com or by telephoning 020 7933 8780.
Investor Presentation: 16:00 today
Management will be providing a presentation and hosting an
Investor Q&A session on the results and future prospects today
at 16:00, through the digital platform Investor Meet Company.
Investors can sign up for free and add to attend the presentation
via the following link
https://www.investormeetcompany.com/instem-plc/register-investor
Questions can be submitted pre event and at any time during the
live presentation via the Investor Meet Company Platform.
Phil Reason, CEO of Instem, commented: " The performance during
the Period highlighted our resilience - especially given the
COVID-19 backdrop. Our proven model continues to generate strong
cash flows while the combination of increasing demand for
regulatory-backed solutions and a growing demand for artificial
intelligence and in silico solutions in the drug discovery process
underpins our confidence in further leveraging our product base.
Importantly, we already have good visibility for the current year
with growing SaaS revenues and a strong pipeline.
"We are extremely pleased with our continued strong organic
growth and increasing ability to cross sell to existing and new
clients. Furthermore, we are primed to build on this momentum,
having strengthened our proposition post Period end. The recent
acquisitions of d-wise and The Edge highlight our ability to add
scale and leverage existing customer relationships with a view to
further enhancing earnings and profitability, while providing a
strong platform for continued growth. In addition, we are
continuing discussions with a number of other potential acquisition
targets.
"Given the structural backdrop and opportunities within our
existing client base, we are confident that we are well placed to
continue growing recurring revenues, margins, and cash generation,
and look forward to augmenting organic growth via our ongoing
acquisition strategy. "
For further information, please contact:
Instem plc Via Walbrook
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
Tom Cooper instem@walbrookpr.com
Nick Rome
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 600 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 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 www.instem.com
Chairman's Statement
The performance of the Group during the Period highlights the
resilience of our business model as we generated growing cash
flows, revenues and profits, despite the wider global economic
malaise caused by the COVID-19 pandemic.
Whilst clearly this pandemic had, and continues to have, a
destabilising effect on a number of sectors and businesses, we were
able to take advantage of the continued demand for our leading
solutions and services to the global life sciences market. Further,
we were able to meet new requirements from customers looking to
produce rapid solutions for COVID-19 related drug and vaccine
development projects.
Operationally, we continued to perform in line with market
expectations - with a 10% increase in revenues year-on-year, and
the continued shift towards SaaS further increasing visibility. We
also successfully raised GBP15m net of expenses to accelerate our
acquisition programme through the placing of 3,620,690 new ordinary
shares. The combination of strong cash flow and funds raised meant
that the cash balance at the year-end was GBP26.7m (2019:
GBP6.0m).
Importantly, the investment in our global infrastructure and IT,
made over recent years, meant that we were able to operate highly
effectively across many geographies whilst continuing to deliver
solutions to our clients without interruption. This investment had
been designed to facilitate the requirement for a dispersed and
continuously increasing remote business operation. With sections of
our workforce already working from home prior to the pandemic, the
onset of COVID-19 highlighted our ability to continue delivering
solutions remotely with minimal disruption.
Strategic Direction
Our ability to quickly integrate and add value to acquired
businesses was highlighted by the performance of Leadscope, which
we acquired in November 2019, and which enabled our In Silico
Solutions business unit to grow rapidly during the Period.
We believe that the momentum achieved provides validation of the
strategic potential of the business. In particular, we were
delighted to have made notable progress on a number of fronts
during the Period, namely:
-- Continued growth in SaaS-based revenues (increased 25% to
GBP8.03m) both through new business wins and via the ongoing
conversion of existing clients.
-- The expansion of "technology enabled outsourced services",
where 2020 revenue was GBP6.2m (2019: GBP5.6m).
-- Our market leading S technology and services business continued to perform well
Acquisitive Growth
One of the Group's key long-term objectives has been to acquire
complementary technologies or enter adjacent markets - and given
the wealth of opportunity, we chose to raise GBP15m in July 2020 to
accelerate this strategy. We are delighted to have acquired d-wise
and The Edge post Period end. Both companies bring strong
management teams and synergies with our existing business and
client base. We believe they will be integrated easily and will
quickly be earnings enhancing, whilst also extending our reach from
discovery to clinical trials across the drug discovery and
development lifecycle.
When we combine the performance of the business in the recent
past with the impact of the two recent acquisitions, the step
change in the scale of our operations is strategically significant.
We are extremely excited about the potential we have for new
horizons.
Board
While the business has performed extremely well over recent
years, the Board recognises that it is not currently fully
compliant with the QCA guidelines for corporate governance
regarding the independence of non-executive directors. We intend to
address this situation through additional non-executive director
appointment during the next 12 months. We look forward to updating
shareholders on our efforts in due course.
Summary
Finally, on behalf of the Board, I would like to thank and
congratulate the entire Instem team, who performed admirably
despite the often significant challenges of having to adjust to
home based working, lock downs, home schooling and the many other
impacts of COVID-19. Despite these challenges, the Instem team
continued to make an exceptional contribution to life sciences
R&D in general and specifically to the global endeavour to
rapidly bring safe and effective COVID-19 vaccines and therapies to
market.
David Gare
Non-Executive Chairman
10 April 2021
Chief Executive's Report
The Group continued to enhance its position across all parts of
the business with growth underpinned by the ongoing move to a SaaS
model, resulting in further margin growth during the Period. This
shift is in train with the majority of clients, providing increased
visibility in the overall direction of travel.
The Group has a broad portfolio of products, providing a growing
range of solutions to existing and new clients across the drug
discovery and development lifecycle, and a strong platform for
increased cross-selling and up-selling opportunities. During the
Period, the Group fully integrated Leadscope, which was acquired in
November 2019, further enhancing performance.
The focus remains on building on this success, with the Group
primed for further acquisitive growth following the recent
acquisitions of d-wise and The Edge - having successfully raised
GBP15m net of expenses during the Period to accelerate our
acquisition strategy. Active discussions are ongoing with a number
of targets, with the aim of further driving value across our
existing solutions with the possibility of also broadening our
portfolio.
Market Review
The market backdrop continues to be favourable for the Group,
with global population growth and life expectancy underpinning
increased demand for successful innovation in life sciences.
Increasing amounts of money are being invested in the biotech
industry with the pharmaceuticals sector investing heavily in drug
development, underpinning a strong pipeline for Instem. The market
dynamics were highlighted further by the onset of COVID-19, which
presented a number of new opportunities as R&D increased with
all of the major pharma companies (and many smaller ones) focusing
on developing vaccines or therapies.
In the pharmaceutical industry, which represents the largest
proportion of Instem's revenue, we refer again to the Pharma
R&D Annual Review, the 2021 version of which was released by
Pharma Intelligence in March 2021. This report shows that the
industry grew strongly in the last 12 months with a 4.8% increase
(2019: 9.6%) 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, shows no sign of
abating. Most relevant to Instem was the 6.0% increase (2019:
13.2%) in the number of drugs at the preclinical (or non-clinical)
phase of drug development, that accounted for much of our
business.
The constant development of the drug discovery pipeline
continues to drive demand for Instem's solutions - enabling
companies to provide faster and cheaper routes to market.
Importantly, the regulatory-backed Standard for the Exchange of
Non-clinical Data ("S") continues to underpin longer term
opportunity and visibility. Further regulatory-backed business
lines were added to the Group's portfolio with the acquisition of
Leadscope, providing solutions for the ICH M7 (R1) standard.
Business Performance
Study Management
Performance here was relatively flat, as expected, partly since
revenue recognition from certain software contracts won during the
Period will not be recognised until the current financial year,
coinciding with client deployment and the commencement of annual
support payments.
Encouragingly, the transition to SaaS continued at pace,
outstripping management's expectations - with the accelerated
growth meaning there were fewer new perpetual software licenses,
and correspondingly lower annual support and maintenance fees.
We were delighted to add Biotoxtech, a prominent non-clinical
Contract Research Organization in South Korea, as a new client
during the Period - further enhancing the Group's footprint in the
Asia Pacific region. The contract, worth approximately $1 million,
is for Instem to provide a comprehensive package of preclinical
data collection, analysis and regulatory submissions management
solutions to automate and optimise study related processes.
Separately, the Group was awarded new business with an existing
client worth c.GBP2.2m, which has been extended by a further $0.8m
order post Period end. The new contracts combined Study Management
and Regulatory Solutions products and services, including the
expansion of the client's Provantis user base by over 25% -
reflecting the continuing growth in non-clinical research and
development. Among other things, the funded product development
work under this contract will involve Provantis integration with a
leading third-party digital pathology solution, offering clients
the potential for significant future productivity enhancement and
facilitating the work of an increasingly distributed pathologist
community.
In Silico Solutions
The Group continued to generate strong In Silico Solutions
(previously Informatics) revenue growth, which benefitted from a
solid organic performance as well as a full year's trading from
Leadscope, acquired in November 2019. The addition of Leadscope
broadened the Group's in silico reach, which now incorporates drug
discovery through to early deployment (and beyond), providing a
more rounded offering for existing and new clients.
Having fully integrated Leadscope, which only contributed
six-weeks trading in 2019, the Group was able to drive significant
in silico solutions returns, with comparative revenues more than
doubling to GBP3.3m.
Regulatory Solutions
Every drug company is required to submit non-clinical data in
the S format to the FDA (Food and Drug Administration) as part of
the processes for testing and getting approval for a new drug. The
combination of the industry's focus on addressing a backlog of S
conversion work, in addition to the standard being extended to new
study types, provides a solid platform for continued growth.
Instem's technology creates, manages and visualizes S datasets,
while the Group also provides technology-enabled outsourced
services, enabling customers to make FDA submissions with
confidence. The industry is increasingly looking to unlock silos of
information and importantly, customers are starting to contemplate
Instem's S solutions as a consistent approach to leveraging their
valuable historic studies for more efficient and effective
research. This is providing a growing source of revenue for the
Group, highlighted through a GBP0.7m top-30 pharmaceutical company
contract for conversion of historical studies to the S format, won
during the Period.
Furthermore, as part of the GBP2.2m contract with an existing
client (mentioned above), Instem will provide S staff augmentation
support, which will act as an extension of the client's staff to
help address both current and growing future demand (and backlog)
for S study services.
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:
2020 2019
GBP000 GBP000 % Change
Total revenue 28,217 25,717 10%
Recurring revenue * 16,941 14,862 13%
Recurring revenue as a percentage of total revenue 60% 58% +200bps
Adjusted EBITDA ** 5,919 4,864 22%
Adjusted EBITDA Margin % 21.0% 18.9% +210bps
Cash and cash equivalents 26,724 5,957 349%
* Recurring revenue includes Annual support fees and SaaS
subscription and support fees.
** Earnings before interest, tax, depreciation, amortisation, i
mpairment of goodwill and capitalised
development costs plus non-recurring costs.
In addition, non-financial KPIs are periodically reviewed and
assessed, including customer 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 10% to GBP28.2m (2019: GBP25.7m)
including Leadscope Inc ('Leadscope') revenue, which was acquired
in November 2019. Total organic revenue increased by 3% to GBP26.3m
(2019: GBP25.5m). Recurring revenue, comprising Support &
Maintenance contracts and SaaS subscriptions, increased during the
year by 13% to GBP16.9m (2019: GBP14.9m). Recurring revenue as a
percentage of total revenue was 60% (2019: 58%). Revenue from
technology enabled outsourced services increased to GBP6.2m (2019:
GBP5.6m). Operating expenses increased by 7% in the Period
reflecting the addition of the Leadscope cost base, ongoing
investment in operational teams and higher third-party costs
associated with the revenue mix, offset by savings in business
travel due to the pandemic.
Earnings before interest, tax, depreciation, amortisation,
impairment of goodwill and capitalised development cost plus
non-recurring items (Adjusted EBITDA) increased by 20% to GBP5.9m
(2019: GBP4.9m). Excluding Leadscope, the total comparable Adjusted
EBITDA increased by 13% to GBP5.3m (2019: GBP4.7m). The EBITDA
margin as a percentage of revenue increased in the year to 21.0%
from 18.9% in 2019.
Non-recurring costs in the year of GBP0.6m (2019: GBP0.3m)
included GBP0.5m of acquisition costs and GBP0.1m of legal costs
associated with historical contract disputes (2019: GBP0.2m
acquisition costs and GBP0.1m legal costs).
The reported profit before tax for the year was GBP2.5m (2019:
loss of GBP0.9m). 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 costs plus amortisation of intangibles on acquisitions)
was GBP4.0m (2019: GBP3.2m).
The total income tax charge in the year of GBP0.3m (2019:
GBP0.02m) represents 10.8% of the Group's profit before tax (2019:
2.4% of the Group's loss before tax ), with the reduction against
the United Kingdom corporate tax rate of 19% due to the Group's
ability to receive additional tax relief on its research and
development expenditure. This additional relief is expected to
continue into future years.
The Group continues to maintain its investment in its product
portfolio. Research and development costs incurred during the year
were GBP3.4m (2019: GBP3.0m), of which GBP1.2m (2019: GBP1.3m) was
capitalised.
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 currency that gave rise to this risk
in 2020 was primarily from realised US dollar transactions. The
foreign exchange loss recorded during 2020 was GBP454k (2019:
GBP41k) which is composed of realised and unrealised
gains/losses.
Basic and diluted earnings per share calculated on an adjusted
basis were 20.4p and 19.1p respectively (2019: 19.3p basic and
18.4p diluted). The reported basic and diluted earnings per share
were 12.7p and 11.9p respectively (2019: (5.7)p basic and (5.7)p
diluted).
The Period saw strong net cash generated from operating
activities of GBP6.6m (2019: GBP5.4m), largely due to cash inflow
from key contracts, outsourced services, working capital management
and a GBP0.7m tax credit claimed across the Group. In July 2020 the
Group successfully raised equity funds from institutional investors
amounting to GBP15.0m, net of expenses, for the purpose of funding
its M&A strategy. As a result of this cash injection and the
positive organic cash generation achieved in the year, cash
balances increased to GBP26.7m at 31 December 2020, compared with
GBP6.0m as at 31 December 2019.
Following the reporting Period end the Group completed the
acquisition of The Edge Software Consultancy Ltd. ('The Edge') in
March 2021. The acquisition extends the Group into early-stage drug
Discovery, with software products that improve customer
productivity and ensure high-quality data capture in the
laboratory. Total consideration payable for The Edge is up to
GBP8.5m with initial consideration of GBP6.0m satisfied by GBP4.0m
in cash from the equity funds raised in 2020 and GBP2.0m via the
issuance of 391,920 new ordinary shares of 10p each in Instem plc,
GBP0.5m of deferred consideration and up to a further GBP2.0m
payable contingent on The Edge's trading performance in the year
ending 31 December 2021.
On 20 March 2021, Instem exchanged contracts to acquire US-based
clinical trial technology & consulting leader d-Wise
Technologies, Inc ("d-wise"). Completion of the Acquisition took
place on 1 April 2021. d-wise adds a market leading position to the
Group in an attractive adjacent area of clinical trial analysis and
submission, with good future visibility through recurring revenue
streams and already contracted, high value consultancy projects.
The combined strength of Instem and d-wise positions the enlarged
Group as the foremost authority and driving force globally in
generating, analysing and leveraging data from Discovery through
late-stage Clinical Trials. The total consideration is up to $31m
comprising $20m on completion, $8m of deferred consideration and up
to a further $3m which is payable contingent upon the future
financial performance of d-wise. The initial consideration on
completion is being satisfied by $13m in cash and $7m via the
issuance of 868,203 new ordinary shares of 10p each in Instem plc .
The cash is being funded from the Group's existing financial
resources.
The Group's legacy defined benefit pension scheme continues to
remain closed to new members and future accrual. The most recent
triennial actuarial valuation of the Scheme was due as at 5 April
2020 with the results expected to be announced along with the
publication of the Group's interim results for the six-month Period
ending 30 June 2021. At 31 December 2020, the IAS19 accounting
pension deficit increased by GBP2.1m to GBP3.9m (2019: GBP1.8m).
The agreed Group cash contributions currently approximate to
GBP0.5m per annum, payable through to October 2024. The deficit at
the 2020 year-end of GBP3.9m (2019: GBP1.8m) is represented by the
fair value of assets of GBP12.5m (2019: GBP12.0m) and the present
value of funded obligations of GBP16.4m (2019: GBP13.8m), after
applying a discount rate of 1.40% (2019: 2.20%).
The table below provides the data for certain performance
measures mentioned above:
2020 2019
GBP000 GBP000
Annual support fees 8,917 8,418
SaaS subscription and support fees 8,024 6,444
Recurring revenue 16,941 14,862
Licence fees 3,477 3,501
Professional services 1,603 1,773
Technology enabled outsourced services 6,196 5,581
Total revenue 28,217 25,717
EBITDA 5,313 4,562
Non-recurring costs 606 302
* Adjusted EBITDA 5,919 4,864
Profit/(Loss) before tax 2,549 (901)
Amortisation of intangibles arising on acquisition 664 523
Impairment of goodwill and capitalised development costs - 3,175
Non-recurring costs 606 302
Intercompany foreign exchange loss/(gain) 208 61
**Adjusted profit before tax 4,027 3,160
Weighted average number of shares (000's) 19,652 17,053
Adjusted diluted earnings per share 19.4p 18.4p
Cash at bank 35,722 14,955
Bank overdraft (8,998) (8,998)
Cash balance 26,724 5,957
* Earnings before interest, tax, depreciation, amortisation, i
mpairment of goodwill and capitalised development costs plus
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 costs plus amortisation of intangibles on
acquisitions.
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. However, the Group's products may be adversely
affected if economic and market conditions are unfavourable and
revenue may be affected from by impact of accounting or regulatory
changes.
Additionally, weak economic conditions, including the potential
impact of the trading arrangements between the UK and EU at the end
of the Brexit transition period in December 2020 may affect the
future performance of the Group and its clients. One area of
mitigation for the Group is the presence of its wholly owned
subsidiary, Notocord SA, which is based in the EU.
The Group seeks to mitigate exposure to all forms of risk
through a combination of regular performance review and a
comprehensive insurance programme. Additionally, t he 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. Consequently, the Group
ensures that it maintains a diversified portfolio in terms of
customers, revenue mix, geography and markets.
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 mitigates the foreign currency risk
by having both cash inflows and outflows in the relevant foreign
currency due to local revenue generation generally offset by a
local cost base that creates 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 (2019: 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. No customer individually amounts to
more than 10% of the Group revenue. At the 2020 year end the Group
had a maximum credit risk exposure of GBP6.1m (2019: GBP6.9m).
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's
objective is to ensure that adequate facilities are available
through use of bank overdrafts and leases. The Group manages
liquidity risk through regular cash flow forecasting and monitoring
of cash flows, management review and regular review of working
capital and costs. The Group regularly monitors its available
headroom under its borrowing facilities. At 31 December 2020, its
GBP0.5m bank facility was undrawn (2019: GBP0.5m undrawn). The
Group had positive cash reserves of GBP26.7m at the end of the
Period, in addition to the GBP0.5m undrawn working capital
facility, although GBP2.5m 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. Since the year-end the
Group has repatriated GBP1.6m of cash from China to the UK.
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 2020, 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 2020 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's future performance depends on
software development, by introducing new and enhancing new products
to meet customer demand. If the Group does not respond effectively
to technological changes, changes in client requirements and
regulatory industry changes then its business may be negatively
affected.
The Group monitors this risk and develops strategic development
plans to ensure it remains compliant with technological advances.
Additionally, the Group produces roadmaps for its key software
products through its close relationships with clients and partners.
In addition, the Group reviews forthcoming regulations to identify
any need to change existing products and to identify opportunities
for developing new products and services.
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.
Acquisitions are carefully assessed by the Board to ensure
alignment with the Group's acquisition strategy. The Group performs
thorough due diligence, supported by the appropriate use of
external advisers, to help identify any unexpected material adverse
consequences prior to deal completion.
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. If the Group
is unable to attract and retain qualified personnel it is unlikely
to meet its growth objectives and stakeholder expectations. 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
implemented an all-staff share scheme for the first time.
COVID-19
The risk to the Group, as for any business, is that the COVID-19
pandemic impacts new and existing business activities as clients
and suppliers focus on short term priorities arising from pandemic
or struggle to remain in business.
The Group remains well placed and has seen minimal impact from
COVID-19, with working from home practices implemented and the
majority of business relatively unaffected. There was a small
shortfall in Professional Services revenue compared with budget due
to travel restrictions preventing on-site service delivery plus
Academia was closed for part of the year. It is expected that a
small element of revenue slippage will move into the current year
as we fulfil our strong services backlog.
Post Period-End
The Group completed the earnings enhancing acquisitions of The
Edge and d-wise. The Edge, which was acquired for up to GBP8.5m, is
a discovery software solutions provider with an established client
base across the pharmaceutical, biotechnology, biopharmaceutical
and animal health sectors. Its addition further broadens Instem's
reach into the closely adjacent Discovery Study Management
market.
d-wise, which is a US-based clinical trial technology &
consulting leader, was acquired for up to $31.0m. The d-wise team
and its solutions will create a new operating segment at Instem,
Clinical Trial Acceleration Solutions, which will focus on
leveraging the combined capabilities to further expand areas of
application.
Outlook
The performance during the Period highlighted our resilience -
especially given the COVID-19 backdrop. Our proven model continues
to generate strong cash flows while the combination of increasing
demand for regulatory-backed solutions and a growing demand for
artificial intelligence and in silico solutions in the drug
discovery process underpin our confidence in further leveraging our
product base.
We are extremely pleased with our continued strong organic
growth and increasing ability to cross sell to existing and new
clients. Furthermore, we are primed to build on this momentum,
having strengthened our proposition post Period end. The recent
acquisitions of d-wise and The Edge highlight our ability to add
scale and leverage existing customer relationships with a view to
further enhancing earnings and profitability, while providing a
strong platform for continued growth. In addition, we are
continuing discussions with a number of other potential acquisition
targets.
Given the structural backdrop and opportunities within our
existing client base we are confident that we are well placed to
continue growing recurring revenues, margins, and cash generation,
and look forward to augmenting organic growth via our ongoing
acquisition strategy.
Phil Reason
Chief Executive
10 April 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
Year ended Year ended
31 December 31 December
Note 2020 2019
GBP000 GBP000
REVENUE 2 28,217 25,717
Employee benefits expense (16,508) (13,609)
Other expenses (5,790) (7,244)
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS (ADJUSTED
EBITDA) 5,919 4,864
Depreciation (138) (155)
Amortisation of intangibles arising on acquisitions (664) (523)
Amortisation of internally generated intangibles (736) (755)
Depreciation of right of use assets (572) (607)
Impairment of goodwill and capitalised development costs - (3,175)
OPERATING PROFIT/(LOSS) BEFORE NON-RECURRING COSTS 3,809 (351)
Non-recurring costs 3 (606) (302)
OPERATING PROFIT/(LOSS) AFTER NON-RECURRING COSTS 3,203 (653)
Finance income 4 38 7
Finance costs 5 (692) (255)
PROFIT/(LOSS) BEFORE TAXATION 2,549 (901)
Taxation 6 (275) (22)
PROFIT/(LOSS) FOR THE YEAR 2,274 (923)
OTHER COMPREHENSIVE (EXPENSE)/INCOME
Items that will not be reclassified to profit and loss account:
Actuarial (loss)/gain on retirement benefit obligations (2,537) 30
Deferred tax on actuarial gain/loss 518 (6)
Deferred tax on share options 322 -
(1,697) 24
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations 10 (208)
_______ _______
OTHER COMPREHENSIVE EXPENSE FOR THE YEAR (1,687) (184)
_______ _______
TOTAL COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR 587 (1,107)
PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY 2,274 (923)
TOTAL COMPREHENSIVE INCOME/(EXPENSE) ATTRIBUTABLE TO OWNERS OF THE PARENT
COMPANY 587 (1,107)
Earnings per share
Basic 7 12.3 (5.7p)
Diluted 7 11.6 (5.7p)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2020
2020 2019
GBP000 GBP000 GBP000 GBP000
ASSETS
NON-CURRENT ASSETS
Intangible assets 18,023 18,108
Property, plant and equipment 238 237
Right of use assets 1,742 2,165
Finance lease receivables 128 175
TOTAL NON-CURRENT ASSETS 20,131 20,685
CURRENT ASSETS
Inventories 50 36
Trade and other receivables 6,093 6,921
Finance lease receivables 41 39
Tax receivable 724 1,158
Cash and cash equivalents 26,724 5,957
TOTAL CURRENT ASSETS 33,632 14,111
TOTAL ASSETS 53,763 34,796
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 2,958 2,662
Deferred income 9,878 8,942
Tax payable - 404
Financial liabilities 268 301
Lease liabilities 608 565
Deferred tax liabilities 90 506
TOTAL CURRENT LIABILITIES 13,802 13,380
NON-CURRENT LIABILITIES
Financial liabilities 1,131 559
Retirement benefit obligations 3,868 1,804
Provision for liabilities 250 250
Lease liabilities 1,476 2,004
TOTAL NON-CURRENT LIABILITIES 6,725 4,617
TOTAL LIABILITIES 20,527 17,997
EQUITY
Share capital 2,048 1,662
Share premium 28,172 13,135
Merger reserve 2,432 2,432
Share based payment reserve 930 654
Translation reserve 92 82
Retained earnings (438) (1,166)
TOTAL EQUITY ATTRIBUTABLE TO
OWNERS OF THE PARENT 33,236 16,799
TOTAL EQUITY AND LIABILITIES 53,763 34,746
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2020
-----------------------------------------------------------------------------------------------------------------------
2020 2019
GBP000 GBP000 GBP000 GBP000
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit/ (loss) before taxation 2,549 (901)
Adjustments for:
Depreciation 138 155
Amortisation of intangibles 1,400 1,278
Depreciation of right of use assets 572 607
Impairment of goodwill and
capitalised development costs - 3,175
Share based payment charge 427 75
Retirement benefit obligations (512) (475)
Finance income (38) (7)
Finance costs 692 255
Loss on disposal of fixed assets 2 -
CASH FLOWS FROM OPERATIONS BEFORE
MOVEMENTS IN WORKING CAPITAL 5,230 4,162
Movements in working capital:
(Increase)/decrease in inventories (14) 1
Decrease in trade and other receivables 742 790
Increase in trade, other payables and deferred
income 1,410 693
NET CASH GENERATED FROM OPERATIONS 7,368 5,646
Finance income 38 7
Finance costs (648) (255)
Income taxes 183 25
NET CASH GENERATED FROM OPERATING
ACTIVITIES 6,941 5,423
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalisation of development costs
and software (1,272) (1,344)
Purchase of property, plant and
equipment (141) (91)
Payment of deferred consideration (277) -
Purchase of subsidiary undertakings
(net of cash acquired) - (1,268)
NET CASH USED IN INVESTING ACTIVITIES (1,690) (2,703)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share
capital 15,423 648
Lease interest payment - (2)
Proceeds from government support 810 -
loan
Repayment of lease liabilities (621) (693)
Receipts from sublease of asset 40 7
Repayment of lease capital (15) (34)
NET CASH GENERATED FROM/(USED IN) FINANCING
ACTIVITIES 15,637 (74)
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,888 2,646
Cash and cash equivalents at start
of year 5,957 3,572
Effects of exchange rate changes on
the balance of cash held in
foreign currencies (121) (261)
CASH AND CASH EQUIVALENTS AT OF
YEAR 26,724 5,957
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 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 1,592 12,535 1,598 1,010 290 (698) 16,327
Loss for the year - - - - - (923) (923)
Other comprehensive
(expense)/income
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 at 31
December
2019 1,662 13,135 2,432 654 82 (1,166) 16,799
Profit for the
year - - - - - 2,274 2,274
Other comprehensive
income/(expense)
for the year - - - - 10 (1,697) (1,697)
Total comprehensive
income - - - - 10 577 587
Shares issued 386 15,037 - - - - 15,423
Share based payment - - - 427 - - 427
Reserve transfer
on lapse of share
options - - - (65) - 65 -
Reserve transfer
on exercise of
share options - - - (86) - 86 -
Balance as at 31
December 2020 2,048 28,172 2,432 930 92 (438) 33,236
NOTES TO THE FINANCIAL STATEMENTS
1 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 2020 or 2019 as defined
in section 435 of the Companies act 2006 (CA 2006) but is derived
from those audited financial statements. Statutory financial
statements for 2019 have been delivered to the Registrar of
Companies and those for 2020 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.
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 Wednesday 5 May 2021 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 Thursday 27 May 2021 at the
Company's registered office, 2 Diamond Way, Stone Business Park,
Stone, Staffordshire, ST15 0SD.
At the time of this results announcement, current restrictions
in respect of COVID-19 prohibit public gatherings, with a limited
number of exceptions which do not include attending an AGM. Given
these restrictions, and our commitment to shareholder and employee
safety, we will be unable to admit shareholders to the AGM in
person.
The AGM will therefore be convened with the minimum necessary
quorum (which will be fulfilled by directors of the Company). 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.
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 10 April 2021. 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.
STATEMENT OF COMPLIANCE
While the financial information included in this preliminary
announcement has been prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006 , this announcement does not in itself contain
sufficient information to comply with IFRSs.
BASIS OF PREPARATION
The Group's accounting reference date is 31 December.
This financial information has been prepared on a going concern
basis and prepared on the historical cost basis. Refer to the Going
Concern note for further details.
ADOPTION OF IFRS
The Group and Company financial statements have been prepared in
accordance with IFRS, IAS and International Financial Reporting
Interpretations Committee (IFRICs) effective as at 31 December
2020. The Group and Company have chosen not to adopt any amendments
or revised standards early.
IFRSs ADOPTED IN THE YEAR
There are a number of standards, amendments to standards, and
interpretations which have been issued by the IASB which are all
effective from 1 January 2020. The most significant of these are as
follows:
-- IAS 1 Presentation of Financial Statements and IAS 8
Accounting Policies, Changes in Accounting
Estimates and Errors (Amendment - Definition of Material)
-- IFRS 3 Business Combinations (Amendment - Definition of
Business)
-- Revised Conceptual Framework for Financial Reporting
-- Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39
and IFRS 7)
Those standards, amendments to standards, and interpretations
have been adopted and did not have a material impact on the
accounting policies of the Group.
The practical expedient for COVID-19 Rent Related Concessions
(Amendments to IFRS 16) have not been applied in the current
reporting period.
IFRSs ISSUED BUT NOT YET EFFECTIVE
There are a number of standards, amendments to standards, and
interpretations which have been issued by the IASB that are
effective in future accounting periods that the Group has decided
not to adopt early. The most significant of these is are as
follows, which are all effective for the period beginning 1 January
2021:
-- References to the Conceptual Framework
-- Proceeds before Intended Use (Amendments to IAS 16)
-- Onerous Contracts - Cost of Fulfilling a Contract (Amendments
to IAS 37)
-- Annual Improvements to IFRS Standards 2018-2020 Cycle
(Amendments to IFRS 1, IFRS 9, IFRS 16, IAS 41)
-- Classification of Liabilities as Current or Non-current
(Amendments to IAS 1)
These standards are not expected to have a material impact on
the entity in the current or future reporting periods and on
foreseeable future transactions.
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.
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.
Background
The Directors have adopted the going concern basis in preparing
these financial statements after careful assessment of identified
principal risks and the possible adverse impact on financial
performance. The Directors have assessed the financial position and
liquidity at the end of the reporting period and for the forecast
period up to 31 December 2022, including sensitivity analysis. The
going concern period covers the 12 months from the date of signing
the financial statements. The process and key judgments in coming
to this conclusion are set out below.
The Group's activities, including the factors likely to affect
its future development, performance and position are set out in the
Chairman's Statement and Strategic report. The financial position
of the Group, its cash flows, liquidity position and borrowing
facilities are described in the Financial Review.
Current trading and liquidity
The Group's trading performance for the year ended 31 December
2020 has been strong with Revenues of GBP28.2m and Adjusted EBITDA
of GBP5.9m. Instem is fully operational, with all staff in all
territories working from home in accordance with governmental
guidelines, no staff have been furloughed and there is no intention
of curtailing any business activities. The company has continued to
recruit staff across its geographic footprint.
The Group's financing arrangements consist of a net overdraft
facility of GBP0.5m and a gross limit of GBP9.0m with NatWest Bank
plc to support the Group's working capital needs. As of 31 December
2020, the net facility was undrawn (2019: undrawn). There are no
material covenants associated with the facility.
Following the announcement of the 2019 preliminary results
Instem undertook an equity fund raise in July 2020. This was a
success as it was oversubscribed, raising gross funds of GBP15.75m,
GBP15.0m net of expenses. A further six prestigious institutions
were added to the list of shareholders. We spent GBP4.0m initially
funding the acquisition of The Edge on 1st March 2021 and $13m
spent on the initial funding of the d-wise acquisition on 1st April
2021. The group remains in a strong financial position as both of
these acquisitions are expected to be accretive and cash
generative.
During 2020, the Group received a US government support loan of
$1.1m (GBP0.9m). The Group have applied for these sums to be
forgiven and based on meeting all of the qualifying criteria,
expect to receive a favourable outcome.
The Group acquired the earnings enhancing, cash generative
business of Leadscope Inc. in November 2019, which has been
steadily integrated within the Group during 2020. The only
financial obligation associated with this acquisition during 2021
is a deferred consideration payment of $0.3m due in November
2021.
Other than the initial consideration already paid for The Edge
and d-wise, there are no further financial obligations payable
associated with the acquisitions until 2022, when deferred and
contingent consideration will be due.
Sensitivity Analysis
The Company has considered three scenarios which are also linked
to the company's risks when modelling the forecast results and cash
flow. The sensitivity assessment includes the trading performance
and cash flows of the Edge and d-wise from the date of the
acquisitions.
(a) Base Case Scenario
The Group's detailed forecasts and projections, taking account
of potential risks and uncertainties in the business, market and
liquidity through sensitivity analysis, show that the Group has
adequate resources to enable it to continue in operation through
the forecast period ending 31 December 2022 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
sensitivity analysis and as part of 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.
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. Revenue is
supported by a largely fixed cost base comprising staff and
offices. The Group had net current assets (excluding deferred
income) of GBP29.7m as of 31 December 2020 (2019: GBP10.0m). 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 GBP26.7m at 31 December 2020, in addition to the
GBP0.5m undrawn working capital facility, although GBP2.6m 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 and since the 2020 year-end we have been
able to repatriate GBP1.6m, significantly reducing our financial
exposure to that territory.
(b) Sensitised Scenario
Further stress testing has been carried out to ensure that the
Group has sufficient cash resources to continue its operations
until at least 31 December 2022. In the downside scenario analysis
performed, the Board considered the potential impact of the
COVID-19 outbreak on the Group's results. In preparing this
analysis the following key risks were included: COVID-19 causing a
25% loss of new business for the next twelve months and the risk
effect of foreign exchange movements, particularly between the USD
and GBP. Despite the negative impact of these sensitivities the
model demonstrated that the Group remained viable, even though
profitability and cash over the next twelve months was reduced.
(c) Extreme downside Scenario
The Group then considered a more extreme situation where the
impact of its risks would be more severe such as a significant
negative impact of COVID-19 continuing for an extended period of
time into 2022, assuming there would be no new business at all.
This sensitivity exercise resulted in the Group showing an
operating loss in each of the years ending 31 December 2021 and 31
December 2022 and exhausting its cash reserves from October 2021,
having not drawn its bank facility.
In a scenario where many of the identified risks occurred the
Group 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.
These downside scenarios are considered unlikely.
Even applying the extreme downside scenario sensitivity analysis
throughout the forecast period to 31 December 2022, by taking
sufficient remedial action we expect the Group to remain a going
concern.
Conclusion and Going Concern Statement
After considering the uncertainties described above, the
directors have a reasonable expectation that the Group 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 this 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, subscription and
support, professional services and technology enabled outsourced
services. Software licences, professional services and annual
support are often bundled together in a contract which do not meet
the criteria to be distinct performance obligation, due to a lack
of interdependence between performance obligations. Promises that
are not distinct are combined with other promised goods or services
in the contract, until a performance obligation is satisfied.
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. For SaaS subscription and
support, the Group determines for each contract whether the promise
is considered to be a single performance obligation as the
subscription and support are highly interdependent on one another
given that the customers are required to take the full package of
both the software and support services i.e Instem would not be able
to provide the support services without the provision of the
software nor provide the software without the support services.
Impairment of goodwill
CGUs are identified by the fact they are separate legal entities
and so have their own intangible and tangible assets, other current
assets and generate cash from their products and services that are
separately identifiable from one another. The judgements were made
in respect of the WACC, the revenue growth rate applied and the
allocation of costs across the CGUs.
The carrying value of goodwill must be assessed for impairment
annually. This requires a value in use estimate which is dependent
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 2020 was GBP10.2m
(2019: GBP10.2m).
Management approved to use the same pre-tax WACC across all
CGUs, as it was determined based on the Groups risks and there were
no specific risks related to each CGU or CGU's jurisdiction.
The revenue growth rates and margins are based on current
Board-approved budgets and forecasts covering a period of five
years. Management estimates are considering business growth rates,
payroll and other cost base increases.
The data used for impairment testing procedures are directly
linked to the Group's latest approved budget, adjusted as necessary
to exclude the effects of future reorganisations and asset
enhancements. The budgeted unallocated departmental costs are
assigned to each CGU applying a standard methodology approved by
the Board.
Development Costs
The Group invests on a continual basis in the development of
software for sale to third parties. There is a continual process of
enhancements to and expansion of the software with judgement
required in assessing whether the development costs meet the
criteria for capitalisation. These judgements have been applied
consistently year on year. In making this judgement, the Group
evaluates, amongst other factors, whether there are future economic
benefits beyond the current period, the stage at which technical
feasibility has been achieved, management's intention to complete
and use or sell the product, the likelihood of success,
availability of technical and financial resources to complete the
development phase and management's ability to measure reliably the
expenditure attributable to the project. Judgement is therefore
required in determining the practice for capitalising development
costs.
Estimation uncertainty
Information about estimations and assumptions that may have the
most significant impact 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 2020, the Group has a
provision of GBP0.25m (2019: 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.
Contingent consideration
Where acquisition consideration includes consideration
contingent on performance outcomes being met, the consideration is
valued at the acquisition date based on performance forecasts
available at the time. Those forecasts are reviewed at the
reporting date and the consideration revised where materially
different.
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 if there
is an indication that the other intangible asset is impaired and
the value in use method would be estimated based 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 GBP3.6m and GBP4.3m respectively (2019: GBP4.2m and GBP3.7m).
There was an impairment charge of GBP0.7m on the year ended 31
December 2019.
Pension scheme
As stated above the Group operates a defined benefit pension
scheme. At the end of each six-monthly reporting period the Group
seeks external expert actuarial advice on the assumptions to apply
to the calculation of the scheme's liabilities. The Group then
engages a separate, independent firm of pension advisors to
calculate the scheme surplus or deficit at the reporting date for
accounting purposes. The scheme deficit at 31 December 2020 is
GBP3.9m (2019: GBP1.8m).
Revenue Recognition
For Professional services and technology enabled outsourced
services revenue recognition there is a significant estimation of
the planned project hours, which determines the percentage of
completion of service revenue contracts. Before the project is
started, the project manager estimates the budgeted hours needed
for the agreed services. If the project is expected to overrun,
then the project manager will amend the expected budgeted hours in
accordance with the new available information which also mitigates
the risk of early revenue recognition.
2 REVENUE FROM CONTRACTS WITH CUSTOMERS
Segmental reporting
The Group has disaggregated revenue into various categories in
the following tables which are intended to depict how the nature,
amount, timing and uncertainty of revenue and cash flows are
affected by economic factors.
Prior to 2019, 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 In Silico Solutions.
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 was based on information that was provided to the Instem
Board, the Group's Chief Operating Decision Maker, at the end of
2019.
During 2020 the business implemented a process to more
accurately allocate centrally held operational costs to the
individual segments. However, 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 2020 and 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.
SEGMENTAL REPORTING Study Management Regulatory In Silico
2020 Solutions Solutions Total
GBP000 GBP000 GBP000 GBP000
Total revenue 15,054 9,839 3,324 28,217
Direct attributable costs (3,516) (2,046) (1,630) (7,192)
______ ______ ______ ______
Contribution to indirect
overheads 11,538 7,793 1,694 21,025
Central unallocated indirect
costs (15,106)
______
Adjusted EBITDA 5,919
Depreciation (138)
Amortisation of intangibles
arising on acquisitions (664)
Amortisation of internally
generated intangibles (736)
Amortisation of right of
use assets (572)
Impairment of goodwill and -
capitalised development
costs
______
OPERATING PROFIT BEFORE
NON-RECURRING COSTS 3,809
Non-recurring costs (606)
______
OPERATING PROFIT AFTER NON-RECURRING
COSTS 3,203
Finance income 38
Finance costs (692)
______
PROFIT BEFORE TAXATION 2,549
SEGMENTAL REPORTING Study Management Regulatory In Silico
2019 Solutions Solutions 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 10,818 6,926 832 18,576
overheads
Central unallocated indirect
costs (13,712)
______
Adjusted EBITDA 4,864
Depreciation (155)
Amortisation of intangibles
arising on acquisitions (523)
Amortisation of internally
generated intangibles (755)
Amortisation of right of
use assets (607)
Impairment of goodwill and
capitalised development
costs
(3,175)
______
OPERATING LOSS BEFORE NON-RECURRING
COSTS (351)
Non-recurring costs (302)
______
OPERATING LOSS AFTER NON-RECURRING
COSTS (653)
Finance income 7
Finance costs (255)
______
LOSS BEFORE TAXATION (901)
2020 2019
GBP000 GBP000
REVENUE BY PRODUCT TYPE
Licence fees 3,477 3,501
Annual support fees 8,917 8,418
SaaS subscription and support fees 8,024 6,444
Professional services 1,603 1,773
Technology enabled outsourced services 6,196 5,581
______ _______
28,217 25,717
2020 2019
GBP000 GBP000
REVENUE BY GEOGRAPHICAL LOCATION
UK 2,740 3,414
Rest of Europe 5,656 5,051
North America 14,586 12,701
Rest of World 5,235 4,551
______ ______
28,217 25,717
NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION BY GEOGRAPHICAL LOCATION 2020 2019
GBP000 GBP000
UK 17,549 17,779
Rest of Europe 1,436 1,107
North America 524 432
Rest of World 622 881
______ ______
20,131 20,199
There were no customers which represented more than 10% of the
Group revenue in 2020 (2019: none).
3 Non recurring costs
2020 2019
GBP000 GBP000
Guaranteed Minimum Pension (GMP) equalisation provision 5 -
Legal costs relating to historical contract disputes
Acquisition costs 149 106
452 196
606 302
4 Finance income
2020 2019
GBP000 GBP000
Right of use asset interest income 7 -
Other interest 31 7
38 7
5 Finance costs
2020 2019
GBP000 GBP000
Loans and overdrafts 38 34
Unwinding discount on deferred consideration 70 -
Net interest charge on pension scheme 34 60
Lease interest cost - 2
Right of use asset interest cost 96 118
Foreign exchange losses 454 41
692 255
6 Taxation
Income taxes recognised in profit or loss: 2020 2019
GBP000 GBP000
Current tax:
UK corporation tax in respect of previous years (4) 28
Adjustments in respect of R&D tax credit 250 464
Foreign tax (146) (404)
Foreign tax in respect of previous years 39 67
_______ _______
Total current tax credit 139 155
_______ _______
Deferred tax:
Current year charge (165) (69)
Adjustment in respect of previous years (57) (11)
Retirement benefit obligation (90) (70)
Impact of rate change (102) -
_______ _______
Total deferred tax charge (414) (177)
_______ _______
Total income tax charge recognised in the current year (275) (22)
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 and a lease held for a telephone system, with less than
twelve months remaining on the lease as at 31 December 2020, 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 No of
No of leases leases leases leases
right Range with with with payments with
Right of of use of remaining extension options linked termination
use assets assets term options to purchase to an options
leased index
Office buildings 10 2.7 years 9 0 1 0
Vehicles 3 2.9 years 0 0 0 0
Right of use assets Land & Motor
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
Additions 123 31 154
Lease modification and
remeasurement 33 - 33
Amortisation (564) (8) (572)
Exchange adjustment (38) - (38)
As at 31 December 2020 1,712 30 1,742
Land & buildings Motor Total
vehicles
Lease liabilities
GBP000 GBP000 GBP000
As at 1 January 2019 3,020 22 2,569
Interest expense 117 1 118
Lease payments (676) (17) (693)
Exchange adjustment 102 - 102
As at 31 December 2019 2,563 6 2,569
Additions 123 31 154
Lease modification and remeasurement 32 - 32
Interest expense 95 - 95
Lease payments (710) (6) (716)
Exchange adjustment (50) - (50)
As at 31 December 2020 2,053 31 2,084
Reconciliation of movements of liabilities to cash flows arising
from financing activities
Changes from financing Land & Motor
cash flows buildings vehicles Total
GBP000 GBP000 GBP000
At 31 December 2019 676 17 693
Interest expenses 95 0 95
Payment of lease liabilities 615 6 621
___ _ ___
At 31 December 2020 710 6 716
Lease liability maturity analysis:
As at 31 December 2020
1 year 2 to 5 After five
or less years years Total
GBP000 GBP000 GBP000 GBP000
Lease liabilities 488 1,538 58 2,084
As at 31 December 1 year 2 to 5 After five
2019 or less 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:
2020 2019
GBP000 GBP000
Expenses relating to short-term leases 45 21
Low value lease expense 95 7
Interest expense 95 118
Amortisation of right of use assets 572 607
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 with losses having an
anti-dilutive effect.
2020 2019
Profit after Weighted Profit per Loss after tax Weighted Loss per share
tax average number share average number
of shares of shares
'000 GBP000 '000 Pence
GBP000 Pence
Earnings per
share - Basic 2,274 18,421 12.3 (923) 16,254 (5.7)
Potentially
dilutive
shares - 1,231 - - 799 -
_______ _______ _______ _______ _______ _______
Earnings per
share -
Diluted 2,274 19,652 11.6 (923) 17,053 (5.7)
_______ _______ _______ _______ _______ _______
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.
2020 2019
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 3,752 18,421 20.4 3,138 16,254 19.3
Potentially
dilutive
shares - 1,231 - - 799 -
_______ _______ _______ _______ _______ _______
Earnings per
share -
Diluted 3,752 19,652 19.1 3,138 17,053 18.4
_______ _______ _______ _______ _______ _______
2020 2019
GBP000 GBP000
Reconciliation of adjusted profit before tax:
Reported profit/(loss) before tax 2,549 (901)
Non-recurring costs 606 302
Amortisation of acquired intangibles 664 523
Impairment of goodwill and capitalised development - 3,175
Foreign exchange differences on revaluation of inter-group
balances 208 61
______ ______
Adjusted profit before tax 4,027 3,160
Tax (275) (22)
______ ______
Adjusted profit after tax 3,752 3,138
_____ _____
Profit/(loss) after tax 2,274 (923)
___ ___ ___ ___
9 Subsequent events
No adjusting events have occurred between the 31 December
reporting date and the date of approval of these financial
statements.
On 25 January 2021, Instem Information Systems (Shanghai)
Limited signed a new 2-year office lease in Pudong New Area,
Shanghai.
On 1 March 2021, Instem announced the acquisition of The Edge
Software Consultancy Ltd ("The Edge"), a safety assessment software
provider based in the UK. The Edge is focused on improving the
efficiency of early-stage drug R&D, improving productivity and
ensuring high-quality data capture. In the year ended 31 July 2020,
The Edge had unaudited, normalised profits before tax of GBP1.7m on
sales of GBP2.7m, of which GBP0.8m was recurring revenue. Its 2020
sales benefitted from high levels of professional services revenue,
expected to be replaced by significant future growth in recurring
software revenue. The consideration payable is up to GBP8.5m,
payable as GBP6.0m initially, satisfied by GBP4.0m in cash from
existing reserves and GBP2.0m via the issuance of 391,920 new
ordinary shares in Instem plc, GBP0.5m of deferred consideration
and up to a further GBP2.0m payable contingent on The Edge's future
trading performance, both amounts payable in cash.
On 20 March 2021, Instem exchanged contracts to acquire US-based
clinical trial technology & consulting leader d-Wise
Technologies, Inc ("d-wise"). The acquisition was completed on 1
April 2021. d-wise adds a market leading position to the Group in
an attractive adjacent area of clinical trial analysis and
submission, with good future visibility through recurring revenue
streams and already contracted, high value consultancy projects. In
the year ended 31 December 2020 d-wise had unaudited adjusted
profit before tax of $3.1m and adjusted EBITDA of $3.6m on sales of
$24.1m. Approximately 30% of revenue was recurring SaaS, hosting
services and software support and maintenance. As at 31 December
2020, d-wise had net assets of $4.8m. The combined strength of
Instem & d-wise positions the enlarged Group as the foremost
authority and driving force in generating, analysing and leveraging
data from Discovery through late-stage Clinical Trials. The total
consideration is up to $31m comprising $20m on completion, $8m of
deferred consideration and up to a further $3m which is payable
contingent upon the future financial performance of d-wise. The
initial consideration on completion is being satisfied by $13m in
cash and $7m via the issuance of 868,203 new ordinary shares of 10p
each in Instem plc. The cash is being funded from the Group's
existing financial resources.
The results of both acquisitions will be incorporated from the
date of acquisition and will be disclosed in the half year results
to 30 June 2021.
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