Final Results

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 £22.7m (2017 restated*: £21.1m)

o  Software as a Service (SaaS) revenues increased 25% to £5.5m (2017: £4.4m)

o  Recurring revenues (annual support and SaaS) increased 6% to £13.7m (2017: £12.9m)

·     Adjusted EBITDA** of £4.1m (2017 restated*: £2.4m)

·     Reported profit before tax of £1.7m (2017 restated*: £0.3m)

·     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 £3.6m (2017: £3.1m)

*Restated due to the adoption of IFRS 15 and its impact on revenue recognition that accounts for £0.4m of additional revenue and £0.3m 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:

·     SEND outsourced services contract wins with two top five global non-clinical Contract Research Organisations ("CROs") each worth in excess of £1m

·     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® 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	[phone]
Phil Reason, CEO
Nigel Goldsmith, CFO
N+1 Singer (Nominated Adviser & Broker)	[phone]
Richard Lindley Alex Bond Rachel Hayes
Walbrook Financial PR	[phone]
Paul Cornelius	[e-mail]
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 £0.6m of revenue and £0.5m of EBITDA previously recognised in 2017 spread into future years, of which £0.4m of revenue and £0.3m of EBITDA has been recognised in the 2018 accounts. Prior to the adjustments the 2018 results would have been revenues of £22.3m (2017 £21.7m) and EBITDA of £3.7m (2017 £3.0m). Our actual reported results for 2018, post adjustments, are therefore revenues of £22.7m (2017 £21.1m) and EBITDA of £4.1m (2017 £2.4m).

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 £3.6m, 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 £5.5m in the period;

·     The expansion of "technology enabled outsourced services", where 2018 revenue was £3.3m (2017  £1.1m) and new business orders were £6.5m:

o  We remain excited by the potential for our SEND services business, where the Group has a market leading offering and continues to secure the majority of contracts awarded. SEND outsourced services new business orders increased over 500% to £5.8m 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 £0.7m 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 SEND (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.

SEND

The Regulatory Solutions business performed well in 2018 following the December 2017 FDA mandate of the Standard for the Exchange of Non-clinical Data. SEND 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 £0.6m of revenue and £0.5m of EBITDA previously recognised in 2017 spread into future years of which £0.4m of revenue and £0.3m of EBITDA has been recognised in the 2018 accounts. Prior to the adjustments the 2018 results would have been revenues of £22.3m (2017 £21.7m) and EBITDA of £3.7m (2017 £3.0m). The actual reported results for 2018, post adjustments, are revenues of £22.7m (2017 £21.1m) and EBITDA of £4.1m (2017 £2.4m). 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 £13.7m (2017: £12.9m), 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 £4.1m (2017: £2.4m 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 £2.8m (2017: £1.4m as restated).  The unadjusted reported profit before tax for the year was £1.7m (2017: £0.3m).

The non-recurring costs in the year included £0.4m of legal and professional fees, plus a £0.1m 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 £3.1m (2017: £3.3m), of which £1.5m (2017: £1.4m) was capitalised.  The Group claimed research and development tax credits in respect of the prior year 2017 of £0.5m (2017 in respect of 2016: £0.6m). At the year-end the Group had estimated available trading tax losses to offset future trading profits of £2.9m.

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 £2.2m (2017: £1.4m), assisted by a net cash inflow on tax following the R&D tax credit claim.  The Group had net cash reserves of £3.6m at 31 December 2018, compared with £3.1m as at 31 December 2017.  The Group paid the previously flagged final instalment of £0.2m 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 £1.5m spent on intangible assets in the year (2017: £1.5m).

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 £1.6m in the funding deficit moving from £3.8m in 2017 to £2.2m in 2018, the main impact (circa £1m) 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 £0.5m payable through to October 2024, by when the funding liability is scheduled to be eliminated. The overall deficit at the year-end stood at £2.2m (2017: £3.8m), represented by the fair value of assets of £10.4m (2017: £10.8m) and the present value of funded obligations of £12.6m (2017: £14.5m). 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 £0.5m bank facility was undrawn (2017: £2.0m 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)

Continuing Operations	Note	Unaudited Year ended  31 December 2018 £000	Audited Year ended 31 December 2017 £000
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 31 December 2018		Audited 31 December 2017
ASSETS	£000	£000	£000	£000
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 Deferred income	2,156 8,625		2,725 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 Provision for liabilities and charges	2,249 250		3,750 250
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 TO OWNERS OF THE PARENT		16,395		13,773
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 Year ended 31 December 2018		Audited Year ended 31 December 2017
					£000	£000	£000	£000
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 END OF YEAR						3,572		3,064

Consolidated Statement of Changes in Equity

Attributable to Owners of the Company

	Called up share capital	Share premium	Merger reserve	Shares to be issued	Translation reserve	Retained earnings	Restated (See note 3) Total  equity
	£000	£000	£000	£000	£000	£000	£000
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 SEND 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 £0.25m 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.

				Unaudited 2018 £000		Restated Audited 2017 £000
	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
				Unaudited 2018 £000		Restated Audited 2017 £000
	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

				Unaudited 2018 £000		Restated Audited 2017 £000
	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 adoption		As Restated
	Income statement for 2017		£000	£000		£000
	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 Taxation PROFIT FOR THE YEAR			797 297 1,094 As previously reported	(545) 93 (452) IFRS 15 adoption		252 390 642 As Restated
	Statement of Financial Position as at 31 December 2017		£000	£000		£000
	Non-current assets Deferred tax asset Total assets Current liabilities Trade and other payables Deferred income Total liabilities Total equity attributable to the owners of the parent Retained earnings		18,039 300 31,869 13,593 2,777 10,370 17,644 14,225 (2,727)	93 93 93 545 (52) 597 545 (452) (452)		18,132 393 31,962 14,138 2,725 10,967 18,189 13,773 (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	IFRS 15 adoption		As reported
	Income statement for 2018		£000	£000		£000
	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

			Unaudited 2018 £000	Restated Audited 2017 £000
	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 2018 £000	Audited 2017 £000
	Guaranteed Minimum Pension (GMP) equalisation provision - see note below Legal costs and cost provision relating to historical contract disputes		(126) (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

				Unaudited 2018 £000		Audited 2017 £000
	Foreign exchange gains		25		184
	Other interest		8		2
			33		186

8. Finance costs

				Unaudited 2018 £000		Audited 2017 £000
	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 tax £000	Weighted average number of shares '000	Earnings per share Pence	Restated Profit after tax £000	Weighted average number of shares '000	Restated Earnings per share 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 Profit after tax £000	2017 Weighted average number of shares '000	Pre- restated Earnings per share Pence
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 Profit after tax £000	Weighted average number of shares '000	Adjusted Earnings per share Pence	Restated Adjusted Profit after tax £000	Weighted average number of shares '000	Restated Adjusted Earnings per share 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 Profit after tax £000	2017 Weighted average number of shares '000	Pre- restated Earnings per share Pence
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:	Unaudited 2018 £'000	Restated Audited 2017 £'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.

 

END

 

 

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