TIDMINS
RNS Number : 5828U
Instem plc
01 April 2019
Instem plc
("Instem" or the "Group")
Unaudited Results for the Year Ended 31 December 2018
Instem (AIM: INS.L), a leading provider of IT solutions to the
global early development healthcare market, announces its unaudited
full year results for the year ended 31 December 2018.
Financial Highlights:
-- Revenues increased 8% to GBP22.7m (2017 restated*: GBP21.1m)
o Software as a Service (SaaS) revenues increased 25% to GBP5.5m
(2017: GBP4.4m)
o Recurring revenues (annual support and SaaS) increased 6% to
GBP13.7m (2017: GBP12.9m)
-- Adjusted EBITDA** of GBP4.1m (2017 restated*: GBP2.4m)
-- Reported profit before tax of GBP1.7m (2017 restated*: GBP0.3m)
-- Basic earnings per share of 9.2p (2017 restated*: 4.1p)
-- Fully diluted earnings per share of 8.7p (2017 restated*: 4.0p)
-- Adjusted*** fully diluted earnings per share of 15.5p (2017 restated*: 11.0p)
-- Net cash balance as at 31 December 2018 of GBP3.6m (2017: GBP3.1m)
*Restated due to the adoption of IFRS 15 and its impact on
revenue recognition that accounts for GBP0.4m of additional revenue
and GBP0.3m of EBITDA in FY18, which had previously been recognised
in FY17.
**Earnings before interest, tax, depreciation, amortisation 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 and amortisation of intangibles
on acquisitions. Profit is adjusted in this way to provide a
clearer measure of underlying operating performance.
Operational Highlights:
-- S outsourced services contract wins with two top five global
non-clinical Contract Research Organisations ("CROs") each worth in
excess of GBP1m
-- Growing shift towards a SaaS based delivery and revenue model
-- Contract win with leading Fortune 500 Company which adopted
Samarind RMS solution for its worldwide medical products regulatory
tracking system
-- 500 additional Provantis(R) users licensed by our largest CRO client
Phil Reason, CEO of Instem, said: "With increasing momentum in
the business from recent contract wins and the growing pipeline, we
are confident about the outlook for the Group for 2019 and
beyond."
"While our strategy remains focused on Instem's organic revenue
growth, expanding operational gearing and improving positive
cashflow, management will continue to consider complementary
acquisition targets to further develop our position as a market
leading provider of IT solutions to the global life sciences
market."
For further information, please contact:
Instem plc +44 (0) 1785 825 600
Phil Reason, CEO
Nigel Goldsmith, CFO
N+1 Singer (Nominated Adviser
& Broker) +44 (0) 20 7496 3000
Richard Lindley
Alex Bond
Rachel Hayes
Walbrook Financial PR +44 (0) 20 7933 8780
Paul Cornelius instem@walbrookpr.com
Sam Allen
Nick Rome
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
I am pleased to report a further year of profitable growth for
Instem, with improving revenue, earnings and expanding operating
margins.
All parts of the business: Study Management; Informatics; and
Regulatory Solutions; made a positive contribution to the
performance of the Group. Importantly, our loyal customer base
contributed increased recurring revenue from support &
maintenance contracts and SaaS subscriptions, as well as providing
very encouraging levels of repeat business for our technology
enabled outsourced services.
Results and impact of IFRS 15
The Group is now required to report its financial results under
the new IFRS 15 "Revenue from contracts with customers" accounting
standard. As a consequence, certain adjustments have been made to
both the prior year 2017 and 2018 accounts resulting in GBP0.6m of
revenue and GBP0.5m of EBITDA previously recognised in 2017 spread
into future years, of which GBP0.4m of revenue and GBP0.3m of
EBITDA has been recognised in the 2018 accounts. Prior to the
adjustments the 2018 results would have been revenues of GBP22.3m
(2017 GBP21.7m) and EBITDA of GBP3.7m (2017 GBP3.0m). Our actual
reported results for 2018, post adjustments, are therefore revenues
of GBP22.7m (2017 GBP21.1m) and EBITDA of GBP4.1m (2017
GBP2.4m).
The Board believes IFRS15 will have no material effect on the
Group's 2019 expected reported performance.
Cash
The end of the year cash balance increased to GBP3.6m, which was
less than previously expected, due to a number of delayed customer
payments that have now been received.
Firm Foundations
Organic growth initiatives and complementary acquisitions
completed over the past several years mean we now have a
broad-based product portfolio serving several adjacent market
segments within the global life sciences sector. These diversified
revenue sources improve both the robustness of the business and the
quality of our earnings.
Nevertheless, we continue to invest in our personnel and
operations to ensure that we are fully prepared for future organic
and acquisitive growth opportunities.
Strategic Direction
Looking forward, we have several important elements to our
strategy which will be the drivers of future growth and earnings,
each of these showed progress in the year:
-- A focus on materially increasing SaaS based revenues. We
intend to achieve this through a combination of new business wins
directly onto our SaaS platform and accelerating the conversion of
on-premise customers to SaaS, which will increase margins. SaaS
based revenue increased 25% to GBP5.5m in the period;
-- The expansion of "technology enabled outsourced services",
where 2018 revenue was GBP3.3m (2017 GBP1.1m) and new business
orders were GBP6.5m:
o We remain excited by the potential for our S services
business, where the Group has a market leading offering and
continues to secure the majority of contracts awarded. S outsourced
services new business orders increased over 500% to GBP5.8m during
the period;
o Instem's KnowledgeScan augmented intelligence platform has now
gained industry recognition for its Target Safety Assessment
solution. KnowledgeScan new business orders increased 30% to
GBP0.7m during the period; and
-- Expansion of our market penetration across our existing
client base, cross selling additional software and services.
It was a particularly successful year for our Study Management
solutions. This was highlighted by the purchase of 500 additional
Provantis licenses by our largest client, Charles River
Laboratories. Our Clinical business continued to absorb substantial
development resources, leading to a major new release of Alphadas
in early March 2019 addressing some significant client
requirements.
Summary
I am pleased with our progress in 2018 and believe that the
foundations have now been laid for further operational and
financial progress in 2019 and beyond.
Whilst management will continue to pursue complementary
acquisition targets to further develop our position as a market
leading provider of IT solutions to the global life sciences
industry, we remain focused on achieving organic profitable growth,
expanding margins and improving positive cashflow.
Finally, I should note that as a global business, with
significant recurring revenues and with the majority of our
business outside Europe, we believe that the impact of Brexit,
whatever the outcome, should be minimal.
David Gare
Chairman
31 March 2019
Chief Executive's Report
Strategic Development
The period under review was one of solid progress across the
Group, with the anticipated strong growth in technology enabled
outsourced services and a higher than expected transition of
clients to SaaS deployment. The accelerated growth in SaaS revenue,
in line with our strategy, meant that there were fewer new
perpetual software licenses than planned and correspondingly lower
annual support and maintenance fees. Total revenue growth was
therefore slightly lower than anticipated, but careful cost control
ensured that we met our full-year EBITDA target and enhanced
margins.
We have now largely completed the investment in our technology
and resources to enable the Group to secure a leading share of the
FDA's (Food and Drug Administration) mandated S (Standard for
Exchange of Non-clinical Data) market and to cost effectively
deliver high quality results using a blend of resources in the UK,
US and India.
Certification to the Information Security Management Standard
(ISO27001) in 2018 ensures compliance with EU General Data
Protection Regulation (GDPR) and is an important competitive
differentiator for the Group.
Completion of a group-wide deployment of Oracle NetSuite
provides a key platform for operational and financial management,
enabling the Group to scale efficiently within the highly regulated
markets in which it operates.
Market Review
The pharmaceutical industry continues to represent a significant
proportion of our total life sciences market and the record numbers
of drugs in the R&D pipeline (a 6% increase over the prior
year) and a steadily increasing number of world-wide pharmaceutical
companies has provided a positive business environment. The
specific customer markets in which Instem operates remained
particularly strong in 2018, with record numbers of drugs in the
earlier stages of the R&D lifecycle. This underpins robust
recurring SaaS and software maintenance contract renewal rates as
well as bolstering the pipeline for new business revenue.
Growth was also particularly strong in the Asia-Pacific region,
which represented 14% of total revenue in the period, significantly
helped by the continuing substantial funding of pharmaceutical
R&D by the Chinese government.
Study Management
The majority of new business deals in this area were of modest
size, as expected, with the exception of a significant increase in
Provantis user licenses from our largest CRO client. There was
generally solid order volume, particularly for Provantis, our
market leading non-clinical software suite for organisations
engaged in non-clinical safety studies, where additional users,
modules and upgrade projects underpinned the good momentum.
This area contributes the majority of our annual recurring
income and renewal rates remained high. It also provides the
greatest opportunity for conversion of existing clients from
on-premise to SaaS deployment and the internal project to
accelerate this transition is building momentum. During 2018 the
SaaS transition appealed to all types of customers. The move of
long-standing clients to SaaS deployment, including a top three
chemical company and another existing top 20 pharma client, both in
addition to upgrades to Provantis version 10, provides further
evidence that any prior reluctance to make this move is
evaporating.
Provantis has once again dominated the Chinese market with
existing clients expanding and adding both users and modules.
Investment to enhance Instem's early phase clinical product,
Alphadas, was increased in the period in response to current client
needs. These enhancements will have wider market appeal going
forward.
Informatics
New business orders for KnowledgeScan, which can reduce the
traditional cost of Target Safety Assessment (TSA) development by
up to 50%, increased by 30% year-on-year, mainly from repeat
customers, which is demonstrative of a strong and recurring revenue
stream.
By outsourcing all, or augmenting some, of a customer's TSA
projects to Instem, clients are able to conduct more safety
evaluations without increasing resources or costs. Driven by
leading stage technology, including well proven artificial
intelligence, Instem's KnowledgeScan TSA service offers consistent,
systematic and efficient processes that produce high quality
reliable results.
Regulatory Solutions
Regulatory Information Management
In June, we announced that a leading Fortune 500 Company had
adopted Instem's Samarind RMS solution for its worldwide medical
products regulatory tracking system. The contract is worth
approximately US$750,000, incorporating both perpetual license and
SaaS revenue streams, with c. 80% of the contract being recognised
in 2018 and with annual recurring revenue of US$169,000.
Samarind RMS provides medical device and pharmaceutical
companies with a smarter way to manage their Product Information,
facilitating initial marketing authorisation and supporting ongoing
regulatory compliance. The product is optimised to enable these
companies to register and track their regulated products worldwide
by maintaining a single integrated database of all relevant
information, which is then used to update regulators as products
change over time. The comprehensive functionality provided by
Samarind RMS enables customers to systematically define and execute
complex regulatory activities across a globally dispersed workforce
whilst providing a single place to find, analyse and act on a
wealth of product and regulatory information.
S
The Regulatory Solutions business performed well in 2018
following the December 2017 FDA mandate of the Standard for the
Exchange of Non-clinical Data. S technology enabled outsourced
services was particularly strong with new order value in 2018 over
500% higher than the prior period.
To help manage this additional workflow effectively, Instem
recruited an additional 29 staff to its outsourced services team in
2018; 21 in India, four in the US and four in the UK, making 47 in
total globally, substantially more than our competitors. While
expansion will continue in 2019, the rate of recruitment is
moderating as the existing team becomes fully billable and our
technology platform and processes are optimised and leveraged to
increase study throughput.
Financial Review
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.
The Group is now required to report its financial results under
the new IFRS 15 "Revenue from contracts with customers" accounting
standard. As a result, certain adjustments have been made to both
the prior year 2017 and 2018 accounts, resulting in GBP0.6m of
revenue and GBP0.5m of EBITDA previously recognised in 2017 spread
into future years of which GBP0.4m of revenue and GBP0.3m of EBITDA
has been recognised in the 2018 accounts. Prior to the adjustments
the 2018 results would have been revenues of GBP22.3m (2017
GBP21.7m) and EBITDA of GBP3.7m (2017 GBP3.0m). The actual reported
results for 2018, post adjustments, are revenues of GBP22.7m (2017
GBP21.1m) and EBITDA of GBP4.1m (2017 GBP2.4m). After a review
during 2018 of the Group's revenue recognition policy the Group
concluded it was compliant with the new standard (IFRS15) for
recognising the majority of its revenues.
Three contracts for sales of software licences were identified
that required an amendment to the accounting treatment that had
been originally applied to comply with the new standard, two where
the licence revenue had been recognised in full in 2017 and one
which had accelerated revenue in 2018. The nature of the
adjustments had the effect of spreading the revenue from the
respective licence sales over the contract period on a
straight-line basis rather than taking all the licence income to
profit at the point of shipment. A more thorough explanation of the
impact on revenue and EBITDA in 2018 and 2017 from adopting IFRS15
in 2018 and the corresponding updated accounting policy on revenue
recognition applied during 2018 is set out in the notes below. All
prior period comparisons that have been impacted by IFRS15 have
been restated and designated as such.
A key performance indicator of the Group is recurring revenue.
During the year, the total recurring revenue, from support &
maintenance contracts and SaaS subscriptions, increased 6% to
GBP13.7m (2017: GBP12.9m), representing 60% of total revenue (2017:
61%).
Operating costs reflected prudent control whilst investing in
the future by continuing to build the infrastructure to support the
Group's expansion plans, which included the successful
implementation of Oracle NetSuite, a new financial accounting and
reporting system. The Group benefited from a full year of the cost
savings realised during 2017 with overall costs remaining flat year
on year despite the growth in revenues, thus contributing to a
much-improved profit performance.
Earnings before interest, tax, depreciation and amortisation and
non-recurring items ("Adjusted EBITDA") for the year was GBP4.1m
(2017: GBP2.4m as restated) after adding the net positive impact of
the IFRS 15 adjustments. The EBITDA margin increased in the year to
17.8% from 11.5% in 2017.
Adjusted profit before tax (i.e. adjusting for the effect of
foreign currency exchange on the revaluation of inter-company
balances included in finance costs, non-recurring items and
amortisation of intangibles on acquisitions) was GBP2.8m (2017:
GBP1.4m as restated). The unadjusted reported profit before tax for
the year was GBP1.7m (2017: GBP0.3m).
The non-recurring costs in the year included GBP0.4m of legal
and professional fees, plus a GBP0.1m estimated provision created
for the cost of GMP equalisation in the Group's defined benefit
pension scheme. The actual cost to the scheme is being calculated
by the scheme's pension advisers with the scheme's trustees and
will be reflected in a future actuarial calculation of the scheme's
liabilities.
Development costs incurred during the year were GBP3.1m (2017:
GBP3.3m), of which GBP1.5m (2017: GBP1.4m) was capitalised. The
Group claimed research and development tax credits in respect of
the prior year 2017 of GBP0.5m (2017 in respect of 2016: GBP0.6m).
At the year-end the Group had estimated available trading tax
losses to offset future trading profits of GBP2.9m.
Basic and fully diluted earnings per share calculated on an
adjusted basis were 16.4p and 15.5p, respectively (2017: 11.3p
basic and 11.0p fully diluted, as restated). The reported basic and
fully diluted earnings per share were 9.2p and 8.7p, respectively
(2017: 4.1p basic and 4.0p fully diluted).
The Group generated net cash from operating activities of
GBP2.2m (2017: GBP1.4m), assisted by a net cash inflow on tax
following the R&D tax credit claim. The Group had net cash
reserves of GBP3.6m at 31 December 2018, compared with GBP3.1m as
at 31 December 2017. The Group paid the previously flagged final
instalment of GBP0.2m in respect of deferred consideration during
the year, which extinguished the remaining liability in respect of
prior period acquisitions. The Group continued to invest in its
comprehensive suite of software products through its own
development teams, representing the majority of the GBP1.5m spent
on intangible assets in the year (2017: GBP1.5m).
The Group's legacy defined benefit pension scheme has remained
closed to new members since 2000 and to future accrual since 2008.
During the year the April 2017 actuarial valuation was concluded
and the impact was reflected in the IAS19 calculation at 31
December 2018. The valuation resulted in a substantial net decrease
of GBP1.6m in the funding deficit moving from GBP3.8m in 2017 to
GBP2.2m in 2018, the main impact (circa GBP1m) arising from the
valuation of certain liabilities on a CPI rather than RPI basis
following Counsel's ruling. This represents a substantial benefit
to the Group and has been reflected in the future agreed cash
contributions which 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 overall deficit at the year-end
stood at GBP2.2m (2017: GBP3.8m), represented by the fair value of
assets of GBP10.4m (2017: GBP10.8m) and the present value of funded
obligations of GBP12.6m (2017: GBP14.5m). The next triennial
valuation will be calculated as at 5 April 2020.
Update on historic contract dispute
As originally highlighted in the preliminary results
announcement for the year ended 31 December 2017, released on 26
March 2018, the Group made a cost provision related to historical
contract disputes.
A dispute, which does not affect ongoing operations of the
Group, is now being heard by the German courts, with the initial
hearing held on 22 January 2019. Instem has taken legal advice and
is defending the action. The Group strongly believes that the claim
should be dismissed. Notwithstanding this, the cost provision made
in 2017 will be maintained in the 2018 accounts.
Further announcements will be made as and when appropriate.
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.
The global nature of the market means that the Group is exposed
to currency risk as a consequence of a significant proportion of
its revenue being earned in US Dollars, some of which is mitigated
by operating costs incurred by its US operation. The Group
continually assesses the most appropriate approach to managing its
currency exposure in line with the overall goal of achieving
predictable earnings growth. 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.
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 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 2018, its GBP0.5m bank facility was undrawn (2017:
GBP2.0m facility undrawn).
Brexit - whilst the outcome of Brexit 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 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 Brexit situation and its possible effects.
Outlook
We are very pleased with the performance of the business during
2018 with regulatory requirements delivering the expected
significant increase in demand for our technology enabled
outsourced services.
Growth was also particularly strong in the Asia-Pacific region,
with bookings up 37% on the prior year, primarily attributable to
the continuing funding of pharmaceutical Research & Development
by the Chinese government.
With increasing momentum in the business from recent contract
wins and the growing pipeline, we are confident about the outlook
for the Group for 2019 and beyond.
While our strategy remains focused on Instem's strong organic
revenue growth, expanding operational gearing and improving
positive cashflow, management will continue to consider
complementary acquisition targets to further develop our position
as a market leading provider of IT solutions to the global life
sciences market.
Phil Reason
Chief Executive
31 March 2019
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018
Restated
(See note 3)
Unaudited Audited
Year ended Year ended
Continuing Operations Note 31 December 2018 31 December 2017
GBP000 GBP000
REVENUE 2 22,705 21,071
Operating expenses (18,437) (18,497)
Share based payment (216) (157)
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS ('EBITDA') 4,052 2,417
Depreciation (144) (186)
Amortisation of intangibles arising on acquisition (788) (931)
Amortisation of internally generated intangibles (738) (473)
PROFIT BEFORE NON-RECURRING COSTS 2,382 827
Non-recurring costs 6 (539) (443)
PROFIT FROM OPERATIONS 1,843 384
Finance income 7 33 186
Finance costs 8 (199) (318)
PROFIT BEFORE TAXATION 1,677 252
Taxation 5 (207) 390
PROFIT FOR THE YEAR 1,470 642
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to profit and loss account:
Actuarial gain on retirement benefit obligations 1,300 664
Deferred tax on actuarial gain (221) (113)
1,079 551
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations (193) (565)
OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR 886 (14)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,356 628
PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY 1,470 642
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT
COMPANY 2,356 628
Earnings per share from continuing operations
Basic 9 9.2p 4.1p
Diluted 9 8.7p 4.0p
Consolidated Statement of Financial Position
As at 31 December 2018
Restated
(See note 3)
Unaudited Audited
31 December 2018 31 December 2017
ASSETS GBP000 GBP000 GBP000 GBP000
NON-CURRENT ASSETS
Intangible assets 17,411 17,440
Property, plant and equipment 300 299
Deferred tax asset - 393
TOTAL NON-CURRENT ASSETS 17,711 18,132
CURRENT ASSETS
Inventories 37 29
Trade and other receivables 7,807 9,470
Current tax receivable 1,013 1,267
Cash and cash equivalents 3,572 3,064
TOTAL CURRENT ASSETS 12,429 13,830
TOTAL ASSETS 30,140 31,962
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 2,156 2,725
Deferred income 8,625 10,967
Current tax payable 401 226
Financial liabilities 34 220
Deferred tax liabilities 12 -
TOTAL CURRENT LIABILITIES 11,228 14,138
NON-CURRENT LIABILITIES
Financial liabilities 18 51
Retirement benefit obligations 2,249 3,750
Provision for liabilities
and charges 250 250
TOTAL NON-CURRENT LIABILITIES 2,517 4,051
TOTAL LIABILITIES 13,745 18,189
EQUITY
Share capital 1,592 1,589
Share premium 12,535 12,488
Merger reserve 1,598 1,598
Shares to be issued 1,010 794
Translation reserve 290 483
Retained earnings (630) (3,179)
TOTAL EQUITY ATTRIBUTABLE 13,773
TO OWNERS OF THE PARENT 16,395
TOTAL EQUITY AND LIABILITIES 30,140 31,962
The adoption of IFRS 15 Revenue from Contracts with Customers
did not impact the reported Balance Sheet as at 31 December
2016.
Consolidated Statement of Cashflows
For the year ended 31 December 2018
Unaudited Audited
Year ended Year ended
31 December 2018 31 December 2017
GBP000 GBP000 GBP000 GBP000
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit before taxation 1,677 252
Adjustments for:
Depreciation 144 186
Amortisation of intangibles 1,526 1,404
Share based payment 216 157
Retirement benefit obligations (498) (461)
Finance income (33) (186)
Finance costs 199 318
Decrease in deferred contingent
consideration - (148)
CASH FLOWS FROM OPERATIONS BEFORE
MOVEMENTS IN WORKING CAPITAL 3,231 1,522
Movements in working capital:
(Increase)/Decrease in inventories (7) 700
Decrease/(Increase) in trade
and other receivables 1,997 (3,043)
(Decrease)/Increase in trade
& other payables and deferred
income (3,448) 2,353
CASH GENERATED FROM OPERATIONS 1,773 1,532
Finance income 33 186
Finance costs (11) (112)
Income taxes 408 (214)
NET CASH GENERATED FROM OPERATING
ACTIVITIES 2,203 1,392
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of intangible assets (1,497) (1,517)
Purchase of property, plant
and equipment (145) (117)
Payment of deferred contingent
consideration (200) (687)
Repayment of capital from
finance leases (31) (30)
NET CASH USED IN INVESTING
ACTIVITIES (1,873) (2,351)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issue of share
capital (net of fees) 50 29
Finance lease interest (4) (6)
NET CASH GENERATED FROM FINANCING
ACTIVITIES 46 23
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 376 (936)
Cash and cash equivalents
at start of year 3,064 4,189
Effects of exchange rate changes
on the balance of cash held
in foreign currencies 132 (189)
CASH AND CASH EQUIVALENTS
AT OF YEAR 3,572 3,064
Consolidated Statement of Changes in Equity
Attributable to Owners of the Company
Restated
Called (See note
up share Share Merger Shares Translation Retained 3)
capital premium reserve to be reserve earnings Total
issued equity
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Balance as
at
1 January 2017 1,577 12,462 1,432 864 1,048 (4,599) 12,784
Profit for
the year - - - - - 642 642
Other comprehensive
income/(expense)
for the year - - - - (565) 551 (14)
Total comprehensive
income - - - - (565) 1193 628
Shares issued 12 26 166 - - - 204
Share based
payment - - - 157 - - 157
Reserve transfer
on lapse of
share options - - - (227) - 227 -
Balance as
at
31 December
2017 - Audited
- Restated 1,589 12,488 1,598 794 483 (3,179) 13,773
Profit for
the year - - - - - 1,470 1,470
Other comprehensive
income/(expense)
for the year - - - - (193) 1,079 886
Total comprehensive
income - - - - (193) 2,549 2,356
Shares issued 3 47 - - - - 50
Share based
payment - - - 216 - - 216
__
Balance as
at
31 December
2018 -Unaudited 1,592 12,535 1,598 1,010 290 (630) 16,395
Notes to the Financial Statements
1. Basis of Preparation
FINANCIAL INFORMATION
The preliminary financial information does not constitute
statutory accounts within the meaning of section 434 of the
Companies Act 2006 but is derived from accounts for the years ended
31 December 2018 and 31 December 2017. The figures for the year
ended 31 December 2017 were audited. The preliminary financial
information is prepared on the same basis as will be set out in the
statutory accounts for the year ended 31 December 2018. The figures
for the year ended 31 December 2018 are unaudited.
The preliminary financial information was approved for issue by
the Board of Directors on 31 March 2019.
The audit of the statutory accounts for the year ended 31
December 2018 is not yet complete. These accounts will be finalised
on the basis of the financial information presented by the
directors in the preliminary announcement. The statutory accounts
for the year ended 31 December 2018 will be delivered to the
Registrar of Companies following the Company's Annual General
Meeting. Statutory accounts for the year ended 31 December 2017
have been filed with the Registrar of Companies. The auditor's
report on those 2017 accounts was unqualified and did not contain
any statement under Section 498 (2) or (3) of the Companies Act
2006.
GENERAL INFORMATION
The principal activity of the Group is the provision of world
class information solutions for Life Sciences research and
development in the early phase drug development market. Instem plc
is a company incorporated in England and Wales under the Companies
Act 2006 and domiciled in the UK. The registered office is Diamond
Way, Stone Business Park, Stone, Staffordshire, ST15 0SD, UK.
BASIS OF ACCOUNTING
While the financial information included in this preliminary
announcement has been prepared in accordance with the recognition
and measurement criteria of International Financial Reporting
Standards (IFRS), as adopted by the European Union (EU), this
announcement does not in itself contain sufficient information to
comply with IFRSs.
The Group's accounting reference date is 31 December.
KEY ACCOUNTING POLICIES
IFRS 15 Revenue from Contracts with Customers is effective for
the Group for the period starting 1 January 2018. The Group has
applied IFRS 15 retrospectively to each prior reporting period and
will utilise certain practical expedients available in IFRS 15.
The adoption of IFRS 15 does not alter the total contract value
or timing of cash flows. The revenue recognition from annual
support fees and SaaS subscriptions does not change, as these
continue to be spread rateably over the term of the contract.
Management will continue to assess the revenue recognition from
SaaS and maintenance and support services and whether they are a
combined or distinct performance obligation on a contract by
contract basis.
There are two key areas where the adoption of IFRS 15 changes
current revenue recognition:
Bundled contracts:
Software licences, professional services and annual support are
often bundled together in a contract. Under IFRS 15, a contract by
contract assessment is completed to identify the performance
obligations in each contract and may identify that the promise in
the contract is a single performance obligation resulting in the
total value of the contract being combined as one obligation and
recognised over the contract term. The impact of this is a
reduction of revenue previously recognised; an increase in deferred
income and an increase in monthly recurring revenue going forward.
Previously under IAS 18 revenue from professional services was
recognised as the work was completed, revenue from the software
licence was recognised when the risks and rewards of ownership of
the product were transferred to the customer and revenue from the
annual support was recognised over the term of the contract. This
resulted in the revenue being recognised earlier in the contract
period. For the years 2017 and 2018 Management identified three
contracts where a single contractual obligation existed, resulting
in the licence fee income being recognised over the period of the
contracts rather than at the point of delivery.
Where software licenses, professional services and annual
support are not part of a bundled contract or where a bundled
contract is deemed not to represent a single performance obligation
the revenue recognition for each revenue element does not change
under IFRS15. Management will assess whether software licences,
professional services and annual support are distinct performance
obligations on a contract by contract basis.
Contract costs:
Under IFRS 15, sales commissions that are incremental to
obtaining the contract and are expected to be recovered are
capitalised as a cost of obtaining the contract and amortised over
the life of the contract. These costs were previously expensed to
the income statement as incurred.
Costs associated with the installation of software are
capitalised as contract fulfilment assets and amortised over the
life of the contract. Installation costs were previously expensed
to the income statement as incurred.
REVENUE RECOGNITION
The Group has adopted IFRS 15 (Revenue from Contracts with
Customers) in determining appropriate revenue recognition
principles.
The Group generates revenue from the provision of software
licences, annual support, SaaS subscriptions, professional services
and technology enabled outsourced services.
At contract inception, an assessment is completed to identify
the performance obligations in each contract. Performance
obligations in a contract are either goods or services that are
distinct or part of a series of goods or services that are
substantially the same and have the same pattern of transfer to the
customer. Promises that are not distinct are combined with other
promised goods or services in the contract, until a performance
obligation is satisfied.
At contract inception, the transaction price is determined,
being the amount that the group expects to receive for transferring
the promised goods or services. The transaction price is allocated
to the performance obligations in the contract based on their
relative standalone selling prices. The group has determined that
the contractually stated price represents the standalone selling
price for each performance obligation.
Revenue is recognised when a performance obligation has been
satisfied by transferring the promised product or service to the
customer.
Software licences
Revenue from the sale of the software licences is recognised
when the customer takes possession of the software which is usually
when the license key is provided to the customer. This is because
the software is functional at the time the licence transfers to the
customer and the Group is not required or expected to undertake
activities that significantly affect the utility of the
intellectual property by the customer.
Annual support
Customers typically enter into a support contract for a period
of twelve months. This contract provides the customer with access
to technical support and software upgrades. The promises in these
contracts are a single performance obligation, which is satisfied
over time as the customer consumes the benefits of the service.
Revenue in respect of the single performance obligation is
recognised evenly over the contract term.
SaaS subscription and support
Customers typically enter into a SaaS contract for a period of
twelve months and pay a fixed amount in exchange for the right to
access software on a hosted server along with access to maintenance
and support. Initial SaaS contracts may also include some
installation or customisation of the software and training for
staff. The promises in this contract are considered to be a single
performance obligation and the revenue is recognised over the
period of the contract on a straight-line basis.
Professional services and technology enabled outsourced
services
Customers typically enter into a service contract to provide
distinct service work based on clear statements of work. Service
work includes, but is not limited to, implementation services,
training and outsourced services work relating to S and
KnowledgeScan. The promises in this contract are considered to be a
single performance obligation and the revenue is recognised on a
percentage completion basis for fixed price contracts or as
services are provided in respect of time and materials
contracts.
Bundled contracts
Software licences, professional services and annual support are
often bundled together in a contract.
Unless otherwise noted during the contract assessment, the three
revenue elements are considered to be separate performance
obligations on the basis that the software licence can be delivered
with or without the professional services and annual support and
management has determined that, although the annual support
provides the customer with access to software upgrades, these
upgrades are rarely utilised within the initial contract period and
do not significantly enhance the intellectual property of the
purchased software licence, therefore the products and services are
not interdependent or interrelated with another good or service. In
allocating the consideration to the separate performance
obligations the standalone selling price is used.
Where the contract assessment identifies that the sale does not
meet the criteria to be a distinct performance obligation, promises
that are not distinct are combined with other promised goods or
services in the contract, until a performance obligation is
satisfied. Revenue in respect of this bundled performance
obligation is recognised over the period of the contracted
obligation on a straight-line basis.
Deferred and accrued income
In most cases, customers are invoiced and payment is received in
advance of revenue being recognised in the income statement.
Deferred and accrued income is the difference between amounts
invoiced to customers and revenue recognised under the policy
described above. If the amount of revenue recognised exceeds the
amounts invoiced the excess amount is included within amounts
recoverable on contracts.
Contract costs
The incremental costs associated with obtaining a contract are
recognised as an asset if the group expects to recover the costs.
Costs that are not incremental to a contract are expensed as
incurred. Management determine which costs are incremental and meet
the criteria for capitalisation.
Costs to fulfil a contract, which are not in the scope of
another standard, are recognised separately as a contract
fulfilment asset to the extent that they relate directly to a
contract which can be specifically identified; the costs generate
or enhance resources that will be used to satisfy the performance
obligation and the costs are expected to be recovered. Management
applies judgement to determine which contract fulfilment costs meet
the recognition criteria, and in particular if the costs generate
or enhance resources used to satisfy the performance
obligation.
Costs to fulfil a contract which do not meet the criteria above
are expensed as incurred.
Contract fulfilment asset
Contract fulfilment assets are amortised over the expected
contract period on a systematic basis representing the pattern in
which control of the associated service is transferred to the
customer.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Certain year end asset and liability amounts reported in the
financial information are based on management estimates and
assumptions. There is therefore a risk of significant changes to
the carrying amounts of these assets and liabilities within the
next financial year. The estimates and assumptions are made on the
basis of information and conditions that existed at the time of the
valuation.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it
is more likely than not that sufficient and suitable taxable
profits will be available in the future against which the reversal
of temporary differences can be deducted. Where the temporary
differences are related to losses, relevant tax law is considered
to determine the availability of the losses to offset against the
future taxable profits. The amount recognised in the consolidated
financial statements is derived from management's best estimation
and judgement incorporating forecasts and all available
information. Recognition therefore involves judgement regarding the
future financial performance of the particular legal entity or tax
group in which the deferred tax asset has been recognised.
Provision for liabilities and charges
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 2018, the Group was
carrying a provision of 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
advice received by the Group.
Impairment
At each reporting date, the Group reviews the carrying amounts
of goodwill and investments. The recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss
(if any). Where the asset does not generate cash flows that are
independent from other assets, the Group estimates the recoverable
amount of the cash-generating unit (CGU) to which the asset
belongs. A key factor which could result in an impairment of
goodwill or investments is lower than predicted profitability. The
CGU with the most sensitivity to obtaining future custom and
profitability is Instem Clinical where an additional increase of
28% in the discount rate or a reduction in revenues of 31% would
result in the recoverable amount of the CGU being equal to its
carrying amount. The forecasts to support Clinical's carrying value
are reliant on winning future contracts that have not yet been
agreed.
GOING CONCERN
Having made appropriate enquiries, the directors consider that
the Group has adequate resources to enable it to continue in
operation for the foreseeable future. The Group has a significant
proportion of recurring revenue from a well-established global
customer base, supported by a largely fixed cost base.
The financial position of the Group, its cash flows and
liquidity position are set out in the primary statements of this
financial information. Detailed projections have been made for the
12 months following the approval of the financial statements and
sensitivity analysis undertaken. This work gives the directors
confidence as to the future trading performance.
Accordingly, the directors continue to adopt the going concern
basis for the preparation of the financial statements.
2. Segmental Reporting
For management purposes, the Group is currently organised into
one operating segment - Global Life Sciences.
Segment results, assets and liabilities include items directly
attributable to a segment as well as those that can be allocated on
a reasonable basis.
Restated
Unaudited Audited
2018 2017
GBP000 GBP000
REVENUE BY PRODUCT TYPE
Licence fees 3,491 5,194
Annual support fees 8,160 8,446
SaaS subscriptions 5,509 4,424
Professional services 2,204 1,891
Technology enabled outsourced
services 3,341 1,116
22,705 21,071
Restated
Unaudited Audited
2018 2017
GBP000 GBP000
REVENUE BY GEOGRAPHICAL LOCATION
UK 3,504 2,073
Rest of Europe 4,534 4,567
USA and Canada 11,507 12,246
Rest of World 3,160 2,185
22,705 21,071
Restated
Unaudited Audited
2018 2017
GBP000 GBP000
NON-CURRENT ASSETS EXCLUDING
DEFERRED TAXATION BY GEOGRAPHICAL
LOCATION
UK 16,896 17,167
Rest of Europe 624 320
USA and Canada 133 214
Rest of World 58 38
17,711 17,739
MAJOR CUSTOMERS
There were no customers which represented more than 10% of the
Group revenue in 2018 (2017: none).
3. Reconciliation to previously reported information
The table below reconciles key line items in these financial
statements to the information provided in the financial statements
for the year ended 31 December 2017 and the opening statement
financial position at 1 January 2018. The changes relate to the
fully retrospective adoption of IFRS15, Revenue from Contracts with
Customers.
As previously
reported IFRS 15 As Restated
adoption
Income statement for 2017 GBP000 GBP000 GBP000
REVENUE 21,668 (597) 21,071
Operating expenses (18,549) 52 (18,497)
Share based payment (157) - (157)
EARNINGS BEFORE INTEREST, TAXATION,
DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS ('EBITDA') 2,962 (545) 2,417
Depreciation and Amortisation (1,590) - (1,590)
PROFIT BEFORE NON-RECURRING COSTS 1,372 (545) 827
PROFIT BEFORE TAXATION 797 (545) 252
Taxation 297 93 390
PROFIT FOR THE YEAR 1,094 (452) 642
As previously
reported IFRS 15 As Restated
adoption
Statement of Financial Position GBP000 GBP000 GBP000
as at 31 December 2017
Non-current assets 18,039 93 18,132
Deferred tax asset 300 93 393
Total assets 31,869 93 31,962
Current liabilities 13,593 545 14,138
Trade and other payables 2,777 (52) 2,725
Deferred income 10,370 597 10,967
Total liabilities 17,644 545 18,189
Total equity attributable to
the owners of the parent 14,225 (452) 13,773
Retained earnings (2,727) (452) (3,179)
4. Impact of IFRS 15, Revenue from Contracts with Customers, on
the Income statement for the year ended 31 December 2018
The table below shows the impact of IFRS15, Revenue from
Contracts with Customers, on key line items in the Income statement
for the year ended 31 December 2018.
Amounts
excluding IFRS 15 As reported
IFRS 15 adoption
Income statement for 2018 GBP000 GBP000 GBP000
REVENUE 22,322 383 22,705
Operating expenses (18,397) (40) (18,437)
Share based payment (216) - (216)
EARNINGS BEFORE INTEREST, TAXATION,
DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS ('EBITDA') 3,709 343 4,052
Depreciation and Amortisation (1,670) - (1,670)
PROFIT BEFORE NON-RECURRING COSTS 2,039 343 2,382
5. Income Taxes
Restated
Unaudited Audited
2018 2017
GBP000 GBP000
Current tax:
UK corporation tax on result for the - -
year
UK corporation tax in respect of previous
years (85) 306
Adjustments in respect of R&D tax credit 477 567
Foreign tax (403) (379)
Foreign tax in respect of previous years (12) 337
Total current tax (23) 831
Deferred tax:
Current year charge (101) (28)
Adjustment in respect of previous years (83) (357)
Retirement benefit obligation - (56)
Total deferred tax (184) (441)
Total income tax (charge)/credit recognised
in the current year (207) 390
6. Non-recurring costs
Unaudited Audited
2018 2017
GBP000 GBP000
Guaranteed Minimum Pension (GMP) equalisation
provision - see note below (126) -
Legal costs and cost provision relating
to historical contract disputes (49) (250)
Professional fees (364) -
Restructuring costs - (341)
Amendment to contingent consideration
post acquisition - 148
(539) (443)
Note - Pension schemes are legally required to equalise pension
benefits for the effects of unequal Guaranteed Minimum Pensions
(GMPs) between males and females that were accrued since May 1990.
The Group has included a reserve for the cost of GMP equalisation,
based on information from the Group's pension advisors.
7. Finance income
Audited
Unaudited 2017
2018 GBP000
GBP000
Foreign exchange gains 25 184
Other interest 8 2
33 186
8. Finance costs
Unaudited Audited
2018 2017
GBP000 GBP000
Bank loans and overdrafts 11 112
Unwinding discount on deferred
consideration 12 71
Net interest on pension scheme 172 129
Finance lease interest 4 6
199 318
9. Earnings per share
Basic and fully diluted
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 schemes. 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.
2018 2017
Profit after Weighted Earnings per Restated Weighted Restated
tax average number share Profit average number Earnings per
of shares after tax of shares share
'000 '000
GBP000 Pence GBP000 Pence
Earnings per
share - Basic 1,470 15,909 9.2 642 15,831 4.1
Potentially
dilutive
shares - 940 - - 328 -
---------------- --------------- ---------------- ----------- --------------- ---------------
Earnings per
share -
Diluted 1,470 16,849 8.7 642 16,159 4.0
================ =============== ================ =========== =============== ===============
The adoption of IFRS 15 (Revenue from Contracts with Customers)
has impacted Earnings per share (basic and fully diluted). The
pre-restated 2017 position is:
Pre-restated 2017 Pre- restated
Profit Weighted average number of shares Earnings per share
after tax
'000
Pence
GBP000
Earnings per share - Basic 1,094 15,831 6.9
Potentially dilutive shares - 328 -
------------- -------------------------------------- --------------------
Earnings per share - Diluted 1,094 16,159 6.8
============= ====================================== ====================
Adjusted
Adjusted earnings per share is calculated after adjusting for
the effect of foreign currency exchange on the revaluation of
inter-company balances included in finance income/(costs),
non-recurring items 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 schemes. 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.
2018 2017
Adjusted Weighted Adjusted Restated Weighted Restated
Profit after average number Earnings per Adjusted average number Adjusted
tax of shares share Profit after of shares Earnings per
tax share
'000 '000
GBP000 Pence GBP000 Pence
Earnings per
share - Basic 2,611 15,909 16.4 1,782 15,831 11.3
Potentially
dilutive
shares - 940 - - 328 -
--------------- --------------- --------------- --------------- --------------- ---------------
Earnings per
share -
Diluted 2,611 16,849 15.5 1,782 16,159 11.0
=============== =============== =============== =============== =============== ===============
The adoption of IFRS 15 Revenue from Contracts with Customers
has impacted Earnings per share (adjusted basic and fully diluted).
The pre-restated 2017 position is:
Pre-restated 2017 Pre- restated
Profit Weighted average number of shares Earnings per share
after tax
'000
Pence
GBP000
Earnings per share - Basic 2,234 15,831 14.1
Potentially dilutive shares - 328 -
------------- -------------------------------------- --------------------
Earnings per share - Diluted 2,234 16,159 13.8
------------- -------------------------------------- --------------------
Reconciliation of reported profit before tax
to adjusted profit before tax and adjusted
profit after tax: Restated
Unaudited Audited
2018 2017
GBP'000 GBP'000
Reported profit before tax 1,677 252
Non-recurring costs 539 443
Amortisation of acquired intangibles 788 931
Foreign exchange differences on revaluation
of inter-co balances (186) (234)
Adjusted profit before tax 2,818 1,392
Tax (207) 390
------------ -----------
Adjusted profit after tax 2,611 1,782
============ ===========
10. Annual report and accounts
Copies of the Annual Report and Accounts will be posted to the
Group's shareholders in due course and will be available, along
with this announcement, on Instem's website at
http://investors.instem.com.
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
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