Final Results

RNS Number : 0600V

Instem plc

12 April 2021

Instem plc

("Instem" or "the Company")

Audited Results for the Year Ended 31 December 2020 & Investor Presentation

Instem plc (AIM: INS), a leading provider of IT solutions to the global life sciences market, announces its audited results for the year ended 31 December 2020 (the "Period").

Financial Highlight:

· Revenues increased 10% to £28.2m (2019: £25.7m)

o Software as a Service (SaaS) revenues increased by 25% to £8.0m (2019: £6.4m)

o Recurring revenues (annual support and SaaS) increased 13% to £16.9m (2019: £14.9m)

o Organic revenue growth (excluding Leadscope acquisition in November 2019) of 3% to £26.3m (2019: £25.5m)

· Adjusted EBITDA* of £5.9m (2019: £4.9m)

· Reported profit before tax of £2.5m (2019: loss of £0.9m)

· Adjusted profit before tax** of £4.0m (2019: £3.2m)

· Fully diluted earnings per share of 11.6p (2019: 5.7p loss per share)

· Adjusted fully diluted earnings per share** of 19.1p (2019: 18.4p)

· Cash balance as at 31 December 2020 of £26.7m (2019: £6.0m) - reflecting both very strong operating cash generation and the oversubscribed placing in July 2020

*Earnings before interest, tax, depreciation, amortisation , impairment of goodwill and capitalised development costs plus non-recurring items.

**After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised development costs plus amortisation of intangibles on acquisitions.

Operational Highlights

· Strong performance despite wider market impact of COVID-19

· Placing raising £15m net of expenses for the Group to accelerate its acquisition strategy

· Continued transition to SaaS deployment, increasing recurring revenue

· New business revenue came from a balanced blend of new and existing clients

· Further expansion of footprint in the Asia-Pacific region

Post Period-End Highlights

· Completed the acquisitions of The Edge Software Consultancy ("The Edge") and d-Wise Technologies Inc ("d-wise")

o Extending the Group's reach across the drug discovery and development lifecycle

o Increasing recurring revenues

o Strengthening relationships with existing clients

· Current cash position of circa £14m following payment of initial acquisition consideration

· Deferred and contingent consideration payable of up to approx. £11.1m

Analyst Presentation: 11:00 today

Management will be hosting a presentation via web conference today at 11:00. Analysts wishing to join should register their interest by emailing instem@walbrookpr.com or by telephoning 020 7933 8780.

Investor Presentation: 16:00 today

Management will be providing a presentation and hosting an Investor Q&A session on the results and future prospects today at 16:00, through the digital platform Investor Meet Company. Investors can sign up for free and add to attend the presentation via the following link https://www.investormeetcompany.com/instem-plc/register-investor

Questions can be submitted pre event and at any time during the live presentation via the Investor Meet Company Platform.

Phil Reason, CEO of Instem, commented: " The performance during the Period highlighted our resilience - especially given the COVID-19 backdrop. Our proven model continues to generate strong cash flows while the combination of increasing demand for regulatory-backed solutions and a growing demand for artificial intelligence and in silico solutions in the drug discovery process underpins our confidence in further leveraging our product base. Importantly, we already have good visibility for the current year with growing SaaS revenues and a strong pipeline.

"We are extremely pleased with our continued strong organic growth and increasing ability to cross sell to existing and new clients. Furthermore, we are primed to build on this momentum, having strengthened our proposition post Period end. The recent acquisitions of d-wise and The Edge highlight our ability to add scale and leverage existing customer relationships with a view to further enhancing earnings and profitability, while providing a strong platform for continued growth. In addition, we are continuing discussions with a number of other potential acquisition targets.

"Given the structural backdrop and opportunities within our existing client base, we are confident that we are well placed to continue growing recurring revenues, margins, and cash generation, and look forward to augmenting organic growth via our ongoing acquisition strategy. "

For further information, please contact:

Instem plc	Via Walbrook
Phil Reason, CEO
Nigel Goldsmith, CFO

N+1 Singer (Nominated Adviser & Broker)	+44 (0) 20 7496 3000
Peter Steel Alex Bond Rachel Hayes

Walbrook Financial PR	+44 (0) 20 7933 8780
Tom Cooper	instem@walbrookpr.com
Nick Rome Nicholas Johnson

About Instem

Instem is a leading provider of IT solutions & services to the life sciences market delivering compelling solutions for Study Management and Data Collection; Regulatory Solutions for Submissions and Compliance; and Informatics-based Insight Generation.

Instem solutions are in use by over 600 customers worldwide, including all the largest 25 pharmaceutical companies, enabling clients to bring life enhancing products to market faster. Instem's portfolio of software solutions increases client productivity by automating study-related processes while offering the unique ability to generate new knowledge through the extraction and harmonisation of actionable scientific information.

Instem products and services address aspects of the entire drug development value chain, from discovery through to market launch. Management estimate that over 50% of all drugs on the market have been through some part of Instem's platform at some stage of their development.

To learn more about Instem solutions and its mission, please visit www.instem.com

Chairman's Statement

The performance of the Group during the Period highlights the resilience of our business model as we generated growing cash flows, revenues and profits, despite the wider global economic malaise caused by the COVID-19 pandemic.

Whilst clearly this pandemic had, and continues to have, a destabilising effect on a number of sectors and businesses, we were able to take advantage of the continued demand for our leading solutions and services to the global life sciences market. Further, we were able to meet new requirements from customers looking to produce rapid solutions for COVID-19 related drug and vaccine development projects.

Operationally, we continued to perform in line with market expectations - with a 10% increase in revenues year-on-year, and the continued shift towards SaaS further increasing visibility. We also successfully raised £15m net of expenses to accelerate our acquisition programme through the placing of 3,620,690 new ordinary shares. The combination of strong cash flow and funds raised meant that the cash balance at the year-end was £26.7m (2019: £6.0m).

Importantly, the investment in our global infrastructure and IT, made over recent years, meant that we were able to operate highly effectively across many geographies whilst continuing to deliver solutions to our clients without interruption. This investment had been designed to facilitate the requirement for a dispersed and continuously increasing remote business operation. With sections of our workforce already working from home prior to the pandemic, the onset of COVID-19 highlighted our ability to continue delivering solutions remotely with minimal disruption.

Strategic Direction

Our ability to quickly integrate and add value to acquired businesses was highlighted by the performance of Leadscope, which we acquired in November 2019, and which enabled our In Silico Solutions business unit to grow rapidly during the Period.

We believe that the momentum achieved provides validation of the strategic potential of the business. In particular, we were delighted to have made notable progress on a number of fronts during the Period, namely:

· Continued growth in SaaS-based revenues (increased 25% to £8.03m) both through new business wins and via the ongoing conversion of existing clients.

· The expansion of "technology enabled outsourced services", where 2020 revenue was £6.2m (2019: £5.6m).

· Our market leading SEND technology and services business continued to perform well

Acquisitive Growth

One of the Group's key long-term objectives has been to acquire complementary technologies or enter adjacent markets - and given the wealth of opportunity, we chose to raise £15m in July 2020 to accelerate this strategy. We are delighted to have acquired d-wise and The Edge post Period end. Both companies bring strong management teams and synergies with our existing business and client base. We believe they will be integrated easily and will quickly be earnings enhancing, whilst also extending our reach from discovery to clinical trials across the drug discovery and development lifecycle.

When we combine the performance of the business in the recent past with the impact of the two recent acquisitions, the step change in the scale of our operations is strategically significant. We are extremely excited about the potential we have for new horizons.

Board

While the business has performed extremely well over recent years, the Board recognises that it is not currently fully compliant with the QCA guidelines for corporate governance regarding the independence of non-executive directors. We intend to address this situation through additional non-executive director appointment during the next 12 months. We look forward to updating shareholders on our efforts in due course.

Summary

Finally, on behalf of the Board, I would like to thank and congratulate the entire Instem team, who performed admirably despite the often significant challenges of having to adjust to home based working, lock downs, home schooling and the many other impacts of COVID-19. Despite these challenges, the Instem team continued to make an exceptional contribution to life sciences R&D in general and specifically to the global endeavour to rapidly bring safe and effective COVID-19 vaccines and therapies to market.

David Gare

Non-Executive Chairman

10 April 2021

Chief Executive's Report

The Group continued to enhance its position across all parts of the business with growth underpinned by the ongoing move to a SaaS model, resulting in further margin growth during the Period. This shift is in train with the majority of clients, providing increased visibility in the overall direction of travel.

The Group has a broad portfolio of products, providing a growing range of solutions to existing and new clients across the drug discovery and development lifecycle, and a strong platform for increased cross-selling and up-selling opportunities. During the Period, the Group fully integrated Leadscope, which was acquired in November 2019, further enhancing performance.

The focus remains on building on this success, with the Group primed for further acquisitive growth following the recent acquisitions of d-wise and The Edge - having successfully raised £15m net of expenses during the Period to accelerate our acquisition strategy. Active discussions are ongoing with a number of targets, with the aim of further driving value across our existing solutions with the possibility of also broadening our portfolio.

Market Review

The market backdrop continues to be favourable for the Group, with global population growth and life expectancy underpinning increased demand for successful innovation in life sciences. Increasing amounts of money are being invested in the biotech industry with the pharmaceuticals sector investing heavily in drug development, underpinning a strong pipeline for Instem. The market dynamics were highlighted further by the onset of COVID-19, which presented a number of new opportunities as R&D increased with all of the major pharma companies (and many smaller ones) focusing on developing vaccines or therapies.

In the pharmaceutical industry, which represents the largest proportion of Instem's revenue, we refer again to the Pharma R&D Annual Review, the 2021 version of which was released by Pharma Intelligence in March 2021. This report shows that the industry grew strongly in the last 12 months with a 4.8% increase (2019: 9.6%) in the total number of drugs in the regulatory stages of global R&D, continuing a multi-year growth trend that, subject to the potential impact of COVID-19, shows no sign of abating. Most relevant to Instem was the 6.0% increase (2019: 13.2%) in the number of drugs at the preclinical (or non-clinical) phase of drug development, that accounted for much of our business.

The constant development of the drug discovery pipeline continues to drive demand for Instem's solutions - enabling companies to provide faster and cheaper routes to market. Importantly, the regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND") continues to underpin longer term opportunity and visibility. Further regulatory-backed business lines were added to the Group's portfolio with the acquisition of Leadscope, providing solutions for the ICH M7 (R1) standard.

Business Performance

Study Management

Performance here was relatively flat, as expected, partly since revenue recognition from certain software contracts won during the Period will not be recognised until the current financial year, coinciding with client deployment and the commencement of annual support payments.

Encouragingly, the transition to SaaS continued at pace, outstripping management's expectations - with the accelerated growth meaning there were fewer new perpetual software licenses, and correspondingly lower annual support and maintenance fees.

We were delighted to add Biotoxtech, a prominent non-clinical Contract Research Organization in South Korea, as a new client during the Period - further enhancing the Group's footprint in the Asia Pacific region. The contract, worth approximately $1 million, is for Instem to provide a comprehensive package of preclinical data collection, analysis and regulatory submissions management solutions to automate and optimise study related processes.

Separately, the Group was awarded new business with an existing client worth c.£2.2m, which has been extended by a further $0.8m order post Period end. The new contracts combined Study Management and Regulatory Solutions products and services, including the expansion of the client's Provantis user base by over 25% - reflecting the continuing growth in non-clinical research and development. Among other things, the funded product development work under this contract will involve Provantis integration with a leading third-party digital pathology solution, offering clients the potential for significant future productivity enhancement and facilitating the work of an increasingly distributed pathologist community.

In Silico Solutions

The Group continued to generate strong In Silico Solutions (previously Informatics) revenue growth, which benefitted from a solid organic performance as well as a full year's trading from Leadscope, acquired in November 2019. The addition of Leadscope broadened the Group's in silico reach, which now incorporates drug discovery through to early deployment (and beyond), providing a more rounded offering for existing and new clients.

Having fully integrated Leadscope, which only contributed six-weeks trading in 2019, the Group was able to drive significant in silico solutions returns, with comparative revenues more than doubling to £3.3m.

Regulatory Solutions

Every drug company is required to submit non-clinical data in the SEND format to the FDA (Food and Drug Administration) as part of the processes for testing and getting approval for a new drug. The combination of the industry's focus on addressing a backlog of SEND conversion work, in addition to the standard being extended to new study types, provides a solid platform for continued growth.

Instem's technology creates, manages and visualizes SEND datasets, while the Group also provides technology-enabled outsourced services, enabling customers to make FDA submissions with confidence. The industry is increasingly looking to unlock silos of information and importantly, customers are starting to contemplate Instem's SEND solutions as a consistent approach to leveraging their valuable historic studies for more efficient and effective research. This is providing a growing source of revenue for the Group, highlighted through a £0.7m top-30 pharmaceutical company contract for conversion of historical studies to the SEND format, won during the Period.

Furthermore, as part of the £2.2m contract with an existing client (mentioned above), Instem will provide SEND staff augmentation support, which will act as an extension of the client's staff to help address both current and growing future demand (and backlog) for SEND study services.

Financial Review

Key Performance Indicators (KPIs)

The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available for the working capital requirements of the Group. Primary KPIs at the year-end were:

	2020 £000	2019 £000	% Change

Total revenue	28,217	25,717	10%

Recurring revenue *	16,941	14,862	13%

Recurring revenue as a percentage of total revenue	60%	58%	+200bps

Adjusted EBITDA **	5,919	4,864	22%

Adjusted EBITDA Margin %	21.0%	18.9%	+210bps

Cash and cash equivalents	26,724	5,957	349%

* Recurring revenue includes Annual support fees and SaaS subscription and support fees.

** Earnings before interest, tax, depreciation, amortisation, impairment of goodwill and capitalised development costs plus non-recurring costs.

In addition, non-financial KPIs are periodically reviewed and assessed, including customer and staff retention rates.

Instem's revenue model consists of perpetual licence income with annual support and maintenance contracts, professional fees, technology enabled outsourced services fees and SaaS subscriptions.

Total revenues increased by 10% to £28.2m (2019: £25.7m) including Leadscope Inc ('Leadscope') revenue, which was acquired in November 2019. Total organic revenue increased by 3% to £26.3m (2019: £25.5m). Recurring revenue, comprising Support & Maintenance contracts and SaaS subscriptions, increased during the year by 13% to £16.9m (2019: £14.9m). Recurring revenue as a percentage of total revenue was 60% (2019: 58%). Revenue from technology enabled outsourced services increased to £6.2m (2019: £5.6m). Operating expenses increased by 7% in the Period reflecting the addition of the Leadscope cost base, ongoing investment in operational teams and higher third-party costs associated with the revenue mix, offset by savings in business travel due to the pandemic.

Earnings before interest, tax, depreciation, amortisation, impairment of goodwill and capitalised development cost plus non-recurring items (Adjusted EBITDA) increased by 20% to £5.9m (2019: £4.9m). Excluding Leadscope, the total comparable Adjusted EBITDA increased by 13% to £5.3m (2019: £4.7m). The EBITDA margin as a percentage of revenue increased in the year to 21.0% from 18.9% in 2019.

Non-recurring costs in the year of £0.6m (2019: £0.3m) included £0.5m of acquisition costs and £0.1m of legal costs associated with historical contract disputes (2019: £0.2m acquisition costs and £0.1m legal costs).

The reported profit before tax for the year was £2.5m (2019: loss of £0.9m). Adjusted profit before tax (i.e. adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised development costs plus amortisation of intangibles on acquisitions) was £4.0m (2019: £3.2m).

The total income tax charge in the year of £0.3m (2019: £0.02m) represents 10.8% of the Group's profit before tax (2019: 2.4% of the Group's loss before tax), with the reduction against the United Kingdom corporate tax rate of 19% due to the Group's ability to receive additional tax relief on its research and development expenditure. This additional relief is expected to continue into future years.

The Group continues to maintain its investment in its product portfolio. Research and development costs incurred during the year were £3.4m (2019: £3.0m), of which £1.2m (2019: £1.3m) was capitalised.

The Group operates internationally and is exposed to foreign currency risk on transactions denominated in a currency other than the functional currency and on the translation of the statement of financial position and statement of comprehensive income of foreign operations into sterling. The currency that gave rise to this risk in 2020 was primarily from realised US dollar transactions. The foreign exchange loss recorded during 2020 was £454k (2019: £41k) which is composed of realised and unrealised gains/losses.

Basic and diluted earnings per share calculated on an adjusted basis were 20.4p and 19.1p respectively (2019: 19.3p basic and 18.4p diluted). The reported basic and diluted earnings per share were 12.7p and 11.9p respectively (2019: (5.7)p basic and (5.7)p diluted).

The Period saw strong net cash generated from operating activities of £6.6m (2019: £5.4m), largely due to cash inflow from key contracts, outsourced services, working capital management and a £0.7m tax credit claimed across the Group. In July 2020 the Group successfully raised equity funds from institutional investors amounting to £15.0m, net of expenses, for the purpose of funding its M&A strategy. As a result of this cash injection and the positive organic cash generation achieved in the year, cash balances increased to £26.7m at 31 December 2020, compared with £6.0m as at 31 December 2019.

Following the reporting Period end the Group completed the acquisition of The Edge Software Consultancy Ltd. ('The Edge') in March 2021. The acquisition extends the Group into early-stage drug Discovery, with software products that improve customer productivity and ensure high-quality data capture in the laboratory. Total consideration payable for The Edge is up to £8.5m with initial consideration of £6.0m satisfied by £4.0m in cash from the equity funds raised in 2020 and £2.0m via the issuance of 391,920 new ordinary shares of 10p each in Instem plc, £0.5m of deferred consideration and up to a further £2.0m payable contingent on The Edge's trading performance in the year ending 31 December 2021.

On 20 March 2021, Instem exchanged contracts to acquire US-based clinical trial technology & consulting leader d-Wise Technologies, Inc ("d-wise"). Completion of the Acquisition took place on 1 April 2021. d-wise adds a market leading position to the Group in an attractive adjacent area of clinical trial analysis and submission, with good future visibility through recurring revenue streams and already contracted, high value consultancy projects. The combined strength of Instem and d-wise positions the enlarged Group as the foremost authority and driving force globally in generating, analysing and leveraging data from Discovery through late-stage Clinical Trials. The total consideration is up to $31m comprising $20m on completion, $8m of deferred consideration and up to a further $3m which is payable contingent upon the future financial performance of d-wise. The initial consideration on completion is being satisfied by $13m in cash and $7m via the issuance of 868,203 new ordinary shares of 10p each in Instem plc. The cash is being funded from the Group's existing financial resources.

The Group's legacy defined benefit pension scheme continues to remain closed to new members and future accrual. The most recent triennial actuarial valuation of the Scheme was due as at 5 April 2020 with the results expected to be announced along with the publication of the Group's interim results for the six-month Period ending 30 June 2021. At 31 December 2020, the IAS19 accounting pension deficit increased by £2.1m to £3.9m (2019: £1.8m). The agreed Group cash contributions currently approximate to £0.5m per annum, payable through to October 2024. The deficit at the 2020 year-end of £3.9m (2019: £1.8m) is represented by the fair value of assets of £12.5m (2019: £12.0m) and the present value of funded obligations of £16.4m (2019: £13.8m), after applying a discount rate of 1.40% (2019: 2.20%).

The table below provides the data for certain performance measures mentioned above:

	2020 £000	2019 £000

Annual support fees	8,917	8,418
SaaS subscription and support fees	8,024	6,444

Recurring revenue	16,941	14,862

Licence fees	3,477	3,501
Professional services	1,603	1,773
Technology enabled outsourced services	6,196	5,581

Total revenue	28,217	25,717


EBITDA	5,313	4,562
Non-recurring costs	606	302

*Adjusted EBITDA	5,919	4,864


Profit/(Loss) before tax	2,549	(901)
Amortisation of intangibles arising on acquisition	664	523
Impairment of goodwill and capitalised development costs	-	3,175
Non-recurring costs	606	302
Intercompany foreign exchange loss/(gain)	208	61

**Adjusted profit before tax	4,027	3,160


Weighted average number of shares (000's)	19,652	17,053
Adjusted diluted earnings per share	19.4p	18.4p

Cash at bank	35,722	14,955
Bank overdraft	(8,998)	(8,998)

Cash balance	26,724	5,957

* Earnings before interest, tax, depreciation, amortisation, impairment of goodwill and capitalised development costs plus non-recurring costs.

Principal risks and uncertainties

The directors consider that the global pharmaceutical market is likely to continue to provide growth opportunities for the business. The combination of the high level of annual support renewals and low levels of customer attrition provides revenue visibility to underpin the Group strategy on product and market development. However, the Group's products may be adversely affected if economic and market conditions are unfavourable and revenue may be affected from by impact of accounting or regulatory changes.

Additionally, weak economic conditions, including the potential impact of the trading arrangements between the UK and EU at the end of the Brexit transition period in December 2020 may affect the future performance of the Group and its clients. One area of mitigation for the Group is the presence of its wholly owned subsidiary, Notocord SA, which is based in the EU.

The Group seeks to mitigate exposure to all forms of risk through a combination of regular performance review and a comprehensive insurance programme. Additionally, the Group has a significant proportion of recurring revenue (circa 60% of total) from annual support & maintenance and SaaS contracts from a well-established global customer base. Consequently, the Group ensures that it maintains a diversified portfolio in terms of customers, revenue mix, geography and markets.

v Foreign currency risk

The Group operates internationally and is exposed to foreign currency risk on transactions denominated in a currency other than the functional currency and on the translation of the statement of financial position and statement of comprehensive income of foreign operations into sterling. The main currency giving rise to this risk is US dollars. The Group mitigates the foreign currency risk by having both cash inflows and outflows in the relevant foreign currency due to local revenue generation generally offset by a local cost base that creates a natural hedge.

The Group also generates material cash reserves through its Chinese subsidiary that are not readily available to the UK Group at short notice and, as such, the Group has to maintain sufficient working capital headroom to accommodate any delays in repatriating cash from China. In managing currency risks the Group aims to reduce the impact of short-term fluctuations on the Group's cash inflows and outflows in a foreign currency. The Group continually assesses the most appropriate approach to managing its currency exposure in line with the overall goal of achieving predictable earnings growth. Over the longer term, changes in foreign exchange could have an impact on consolidation of foreign subsidiaries earnings. A 10% decrease in the average value of Sterling against the US dollar would have resulted in an increase in the Group's profit before tax by approximately £0.1m (2019: £0.1m).

v Credit risk

Management aims to minimise the risk of credit losses.

The Group's financial assets are bank balances and cash and trade and other receivables, which represent the Group's maximum exposure to credit risk in relation to financial assets.

The Group's credit risk is primarily attributable to its trade receivables and the Group has policies in place to ensure that sales of products and services are made to customers with appropriate creditworthiness. No customer individually amounts to more than 10% of the Group revenue. At the 2020 year end the Group had a maximum credit risk exposure of £6.1m (2019: £6.9m).

The amounts presented in the statement of financial position are net of impairment provisions.

The Group's exposure to losses from defaults on trade receivables is reduced due to contractual terms which require installation, training, annual licensing and support fees to be invoiced and paid annually in advance.

v Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial commitments as they fall due. The Group's objective is to ensure that adequate facilities are available through use of bank overdrafts and leases. The Group manages liquidity risk through regular cash flow forecasting and monitoring of cash flows, management review and regular review of working capital and costs. The Group regularly monitors its available headroom under its borrowing facilities. At 31 December 2020, its £0.5m bank facility was undrawn (2019: £0.5m undrawn). The Group had positive cash reserves of £26.7m at the end of the Period, in addition to the £0.5m undrawn working capital facility, although £2.5m of the cash was held in bank accounts in China, where it has been traditionally harder to repatriate funds quickly. There are no long-term restrictions on the transfer of funds from the Group bank accounts in China. Since the year-end the Group has repatriated £1.6m of cash from China to the UK.

v Interest rate risk

The Group operates an interest rate policy designed to minimise interest costs and reduce volatility in reported earnings. The Group's bank facility does not allow the US Dollar cash balances to generate interest therefore the Group transfers funds from the US dollar account into the sterling account. Currency transfers have been utilised to maximise the interest gains whilst minimising foreign exchange risks. As at 31 December 2020, the indications are that the UK bank base interest rate will not materially differ over the next 12 months. On the basis of the net cash position at 31 December 2020 and assuming no other changes occur (such as material changes in currency exchange rates) the change in interest rates will not have a material impact on net interest income/(expense).

v Cyber risk

The Group handles much data electronically and is therefore extremely aware of the risks that a cyber-attack could have on its business. It has robust standards in place for establishing and maintaining systems and processes to ensure that the highest standards of data protection are in place. This also applies to any third party who is handling data on behalf of the Group and its customers, such as third-party hosting providers.

v Technology risk

Due to the evolving nature of technology platforms there is a risk of obsolescence. The Group's future performance depends on software development, by introducing new and enhancing new products to meet customer demand. If the Group does not respond effectively to technological changes, changes in client requirements and regulatory industry changes then its business may be negatively affected.

The Group monitors this risk and develops strategic development plans to ensure it remains compliant with technological advances. Additionally, the Group produces roadmaps for its key software products through its close relationships with clients and partners. In addition, the Group reviews forthcoming regulations to identify any need to change existing products and to identify opportunities for developing new products and services.

v Acquisition risk

Any corporate acquisition has associated integration risk. In respect of every acquisition the Group creates an integration plan with assigned responsibilities to a team led by an appointed project manager for delivering against an agreed timetable. This is monitored closely throughout the integration process and any deviations against the plan are flagged and actioned accordingly. Acquisitions are carefully assessed by the Board to ensure alignment with the Group's acquisition strategy. The Group performs thorough due diligence, supported by the appropriate use of external advisers, to help identify any unexpected material adverse consequences prior to deal completion.

v Recruitment and retention risk

As its people are the Group's major asset, it is critical to ensure that it recruits the best staff possible and that these individuals are rewarded and developed appropriately. If the Group is unable to attract and retain qualified personnel it is unlikely to meet its growth objectives and stakeholder expectations. The Group has a global HR team that manages the process of ensuring the staff benefit and reward packages are incentivising for both recruitment and retention purposes. This includes benchmarking against peers and industry norms and considering staff feedback through regular performance review. During 2020 the Group implemented an all-staff share scheme for the first time.

COVID-19

The risk to the Group, as for any business, is that the COVID-19 pandemic impacts new and existing business activities as clients and suppliers focus on short term priorities arising from pandemic or struggle to remain in business.

The Group remains well placed and has seen minimal impact from COVID-19, with working from home practices implemented and the majority of business relatively unaffected. There was a small shortfall in Professional Services revenue compared with budget due to travel restrictions preventing on-site service delivery plus Academia was closed for part of the year. It is expected that a small element of revenue slippage will move into the current year as we fulfil our strong services backlog.

Post Period-End

The Group completed the earnings enhancing acquisitions of The Edge and d-wise. The Edge, which was acquired for up to £8.5m, is a discovery software solutions provider with an established client base across the pharmaceutical, biotechnology, biopharmaceutical and animal health sectors. Its addition further broadens Instem's reach into the closely adjacent Discovery Study Management market.

d-wise, which is a US-based clinical trial technology & consulting leader, was acquired for up to $31.0m. The d-wise team and its solutions will create a new operating segment at Instem, Clinical Trial Acceleration Solutions, which will focus on leveraging the combined capabilities to further expand areas of application.

Outlook

The performance during the Period highlighted our resilience - especially given the COVID-19 backdrop. Our proven model continues to generate strong cash flows while the combination of increasing demand for regulatory-backed solutions and a growing demand for artificial intelligence and in silico solutions in the drug discovery process underpin our confidence in further leveraging our product base.

We are extremely pleased with our continued strong organic growth and increasing ability to cross sell to existing and new clients. Furthermore, we are primed to build on this momentum, having strengthened our proposition post Period end. The recent acquisitions of d-wise and The Edge highlight our ability to add scale and leverage existing customer relationships with a view to further enhancing earnings and profitability, while providing a strong platform for continued growth. In addition, we are continuing discussions with a number of other potential acquisition targets.

Given the structural backdrop and opportunities within our existing client base we are confident that we are well placed to continue growing recurring revenues, margins, and cash generation, and look forward to augmenting organic growth via our ongoing acquisition strategy.

Phil Reason

Chief Executive

10 April 2021

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2020

	Note	Year ended 31 December 2020 £000	Year ended 31 December 2019 £000

REVENUE	2	28,217	25,717
Employee benefits expense		(16,508)	(13,609)
Other expenses		(5,790)	(7,244)

EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS (ADJUSTED EBITDA)		5,919	4,864
Depreciation		(138)	(155)
Amortisation of intangibles arising on acquisitions		(664)	(523)
Amortisation of internally generated intangibles		(736)	(755)
Depreciation of right of use assets		(572)	(607)
Impairment of goodwill and capitalised development costs		-	(3,175)

OPERATING PROFIT/(LOSS) BEFORE NON-RECURRING COSTS		3,809	(351)
Non-recurring costs	3	(606)	(302)

OPERATING PROFIT/(LOSS) AFTER NON-RECURRING COSTS		3,203	(653)

Finance income	4	38	7
Finance costs	5	(692)	(255)

PROFIT/(LOSS) BEFORE TAXATION		2,549	(901)
Taxation	6	(275)	(22)

PROFIT/(LOSS) FOR THE YEAR		2,274	(923)

OTHER COMPREHENSIVE (EXPENSE)/INCOME
Items that will not be reclassified to profit and loss account:
Actuarial (loss)/gain on retirement benefit obligations		(2,537)	30
Deferred tax on actuarial gain/loss		518	(6)
Deferred tax on share options		322	-

		(1,697)	24
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations		10	(208)
		_______	_______
OTHER COMPREHENSIVE EXPENSE FOR THE YEAR		(1,687)	(184)
		_______	_______
TOTAL COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR		587	(1,107)

PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY		2,274	(923)

TOTAL COMPREHENSIVE INCOME/(EXPENSE) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY		587	(1,107)

Earnings per share
Basic	7	12.3	(5.7p)
Diluted	7	11.6	(5.7p)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2020

	2020				2019
	£000		£000		£000		£000
ASSETS
NON-CURRENT ASSETS
Intangible assets	18,023				18,108
Property, plant and equipment	238				237
Right of use assets	1,742				2,165
Finance lease receivables	128				175

TOTAL NON-CURRENT ASSETS			20,131				20,685

CURRENT ASSETS
Inventories	50				36
Trade and other receivables	6,093				6,921
Finance lease receivables	41				39
Tax receivable	724				1,158
Cash and cash equivalents	26,724				5,957

TOTAL CURRENT ASSETS			33,632				14,111

TOTAL ASSETS			53,763				34,796

LIABILITIES
CURRENT LIABILITIES
Trade and other payables	2,958				2,662
Deferred income	9,878				8,942
Tax payable	-				404
Financial liabilities	268				301
Lease liabilities	608				565
Deferred tax liabilities	90				506

TOTAL CURRENT LIABILITIES			13,802				13,380

NON-CURRENT LIABILITIES
Financial liabilities	1,131				559
Retirement benefit obligations	3,868				1,804
Provision for liabilities	250				250
Lease liabilities	1,476				2,004

TOTAL NON-CURRENT LIABILITIES			6,725				4,617

TOTAL LIABILITIES			20,527				17,997

EQUITY
Share capital	2,048				1,662
Share premium	28,172				13,135
Merger reserve	2,432				2,432
Share based payment reserve	930				654
Translation reserve	92				82
Retained earnings	(438)				(1,166)

TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT			33,236				16,799

TOTAL EQUITY AND LIABILITIES			53,763				34,746

CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2020
		2020				2019
		£000		£000		£000		£000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/ (loss) before taxation				2,549				(901)
Adjustments for:
Depreciation				138				155
Amortisation of intangibles				1,400				1,278
Depreciation of right of use assets				572				607
Impairment of goodwill and capitalised development costs				-				3,175
Share based payment charge				427				75
Retirement benefit obligations				(512)				(475)
Finance income				(38)				(7)
Finance costs				692				255
Loss on disposal of fixed assets				2				-

CASH FLOWS FROM OPERATIONS BEFORE MOVEMENTS IN WORKING CAPITAL				5,230				4,162
Movements in working capital:
(Increase)/decrease in inventories				(14)				1
Decrease in trade and other receivables				742				790
Increase in trade, other payables and deferred income				1,410				693

NET CASH GENERATED FROM OPERATIONS				7,368				5,646
Finance income				38				7
Finance costs				(648)				(255)
Income taxes				183				25

NET CASH GENERATED FROM OPERATING ACTIVITIES				6,941				5,423
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalisation of development costs and software		(1,272)				(1,344)
Purchase of property, plant and equipment		(141)				(91)
Payment of deferred consideration		(277)				-
Purchase of subsidiary undertakings (net of cash acquired)		-				(1,268)

NET CASH USED IN INVESTING ACTIVITIES				(1,690)				(2,703)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital		15,423				648
Lease interest payment		-				(2)
Proceeds from government support loan		810				-
Repayment of lease liabilities		(621)				(693)
Receipts from sublease of asset Repayment of lease capital		40 (15)				7 (34)

NET CASH GENERATED FROM/(USED IN) FINANCING ACTIVITIES				15,637				(74)

NET INCREASE IN CASH AND CASH EQUIVALENTS				20,888				2,646
Cash and cash equivalents at start of year				5,957				3,572
Effects of exchange rate changes on the balance of cash held in foreign currencies				(121)				(261)

CASH AND CASH EQUIVALENTS AT END OF YEAR				26,724				5,957

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Share capital

Share premium

Merger

reserve

Shares based payment reserve

Translation

reserve

Retained earnings

Total

equity

£000

Balance as at

1 January 2018

1,592

12,535

1,598

1,010

290

(630)

16,395

Adjustment on initial application of IFRS 16

(68)

Adjusted balance as at 1 January 2019

1,592

12,535

1,598

1,010

290

(698)

16,327

Loss for the year

(923)

Other comprehensive (expense)/income for the year

(208)

(184)

_______

Total comprehensive (expense)/income

(208)

(899)

(1,107)

Shares issued

600

834

1,504

Share based payment

Reserve transfer on exercise of share options

(431)

431

Balance at 31 December 2019

1,662

13,135

2,432

654

(1,166)

16,799

Profit for the year

2,274

Other comprehensive income/(expense) for the year

(1,697)

Total comprehensive income

577

587

Shares issued

386

15,037

15,423

Share based payment

427

Reserve transfer on lapse of share options

(65)

Reserve transfer on exercise of share options

(86)

Balance as at 31 December 2020

2,048

28,172

2,432

930

(438)

33,236

NOTES TO THE FINANCIAL STATEMENTS

1 GENERAL INFORMATION

The principal activity and nature of operations of the Group is the provision of world class IT solutions to the life sciences market. Instem's solutions for data collection, management and analysis are used by customers worldwide to meet the needs of life science and healthcare organisations for data-driven decision making leading to safer, more effective products. Instem plc is a public limited company, listed on AIM, and incorporated in England and Wales under the Companies Act 2006 and domiciled in England and Wales. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD.

STATEMENT OF COMPLIANCE

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements for the years ended 31 December 2020 or 2019 as defined in section 435 of the Companies act 2006 (CA 2006) but is derived from those audited financial statements. Statutory financial statements for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered in due course. The auditors reported on those accounts; their reports were unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

ANNUAL REPORT AND FINANCIAL STATEMENTS

Copies of the Annual Report and Financial Statements and Notice of Annual General Meeting ("AGM") will be posted to the Group's shareholders on Wednesday 5 May 2021 and will be made available, along with this announcement, to view from that date on Instem's website at https://investors.instem.com .

The AGM is to be held at 2.00pm on Thursday 27 May 2021 at the Company's registered office, 2 Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD.

At the time of this results announcement, current restrictions in respect of COVID-19 prohibit public gatherings, with a limited number of exceptions which do not include attending an AGM. Given these restrictions, and our commitment to shareholder and employee safety, we will be unable to admit shareholders to the AGM in person.

The AGM will therefore be convened with the minimum necessary quorum (which will be fulfilled by directors of the Company). The business of the AGM will be restricted to the purposes set out in the formal Notice of AGM. There will be no additional presentations or opportunities for the board of directors to answer questions.

It remains important to the board of directors that your votes are counted at the AGM. All shareholders are therefore strongly encouraged to submit their votes on the formal business to be transacted using the proxy form enclosed with the Notice of AGM.

The chairman of the AGM will propose that each resolution, as set out in the Notice of AGM, is voted on via a poll. This means that each shareholder present in person (which shall only be such number of directors as is sufficient to ensure that the AGM is quorate) or by proxy will have one vote for each share held.

The Company will continue to monitor developments relating to COVID-19. If a situation should arise which necessitates that the arrangements for the AGM be altered, shareholders will be notified promptly via an RNS announcement and the Company's website.

In normal circumstances, the Company's AGM plays an important role in providing an opportunity for the Company's directors to engage with shareholders. The board of directors would therefore like to thank all shareholders in advance for their cooperation with and understanding of the alternative arrangements that the Company has been required to implement this year.

FORWARD-LOOKING STATEMENTS

These results were approved by the Board of Directors and authorised for issue on 10 April 2021. This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.

STATEMENT OF COMPLIANCE

While the financial information included in this preliminary announcement has been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 , this announcement does not in itself contain sufficient information to comply with IFRSs.

BASIS OF PREPARATION

The Group's accounting reference date is 31 December.

This financial information has been prepared on a going concern basis and prepared on the historical cost basis. Refer to the Going Concern note for further details.

ADOPTION OF IFRS

The Group and Company financial statements have been prepared in accordance with IFRS, IAS and International Financial Reporting Interpretations Committee (IFRICs) effective as at 31 December 2020. The Group and Company have chosen not to adopt any amendments or revised standards early.

IFRSs ADOPTED IN THE YEAR

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB which are all effective from 1 January 2020. The most significant of these are as follows:

• IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors (Amendment - Definition of Material)

• IFRS 3 Business Combinations (Amendment - Definition of Business)

• Revised Conceptual Framework for Financial Reporting

• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)

Those standards, amendments to standards, and interpretations have been adopted and did not have a material impact on the accounting policies of the Group.

The practical expedient for COVID-19 Rent Related Concessions (Amendments to IFRS 16) have not been applied in the current reporting period.

IFRSs ISSUED BUT NOT YET EFFECTIVE

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early. The most significant of these is are as follows, which are all effective for the period beginning 1 January 2021:

• References to the Conceptual Framework

• Proceeds before Intended Use (Amendments to IAS 16)

• Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37)

• Annual Improvements to IFRS Standards 2018-2020 Cycle (Amendments to IFRS 1, IFRS 9, IFRS 16, IAS 41)

• Classification of Liabilities as Current or Non-current (Amendments to IAS 1)

These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

BUSINESS COMBINATIONS

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that deferred tax assets or liabilities are recognised and measured in accordance with IAS 12 'Income taxes'.

Consideration may consist of deferred consideration and contingent consideration. Deferred consideration is not based on any performance related conditions and is payable on an agreed future date. Contingent consideration is based on certain performance related conditions and payable on an agreed future date, if those conditions are met.

Deferred consideration and contingent consideration is measured at their acquisition-date fair value and are taken into account in the determination of goodwill. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified.

GOING CONCERN

The financial position of the Group, its cash flows and liquidity position are set out in the primary statements within these financial statements.

Background

The Directors have adopted the going concern basis in preparing these financial statements after careful assessment of identified principal risks and the possible adverse impact on financial performance. The Directors have assessed the financial position and liquidity at the end of the reporting period and for the forecast period up to 31 December 2022, including sensitivity analysis. The going concern period covers the 12 months from the date of signing the financial statements. The process and key judgments in coming to this conclusion are set out below.

The Group's activities, including the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Strategic report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review.

Current trading and liquidity

The Group's trading performance for the year ended 31 December 2020 has been strong with Revenues of £28.2m and Adjusted EBITDA of £5.9m. Instem is fully operational, with all staff in all territories working from home in accordance with governmental guidelines, no staff have been furloughed and there is no intention of curtailing any business activities. The company has continued to recruit staff across its geographic footprint.

The Group's financing arrangements consist of a net overdraft facility of £0.5m and a gross limit of £9.0m with NatWest Bank plc to support the Group's working capital needs. As of 31 December 2020, the net facility was undrawn (2019: undrawn). There are no material covenants associated with the facility.

Following the announcement of the 2019 preliminary results Instem undertook an equity fund raise in July 2020. This was a success as it was oversubscribed, raising gross funds of £15.75m, £15.0m net of expenses. A further six prestigious institutions were added to the list of shareholders. We spent £4.0m initially funding the acquisition of The Edge on 1st March 2021 and $13m spent on the initial funding of the d-wise acquisition on 1st April 2021. The group remains in a strong financial position as both of these acquisitions are expected to be accretive and cash generative.

During 2020, the Group received a US government support loan of $1.1m (£0.9m). The Group have applied for these sums to be forgiven and based on meeting all of the qualifying criteria, expect to receive a favourable outcome.

The Group acquired the earnings enhancing, cash generative business of Leadscope Inc. in November 2019, which has been steadily integrated within the Group during 2020. The only financial obligation associated with this acquisition during 2021 is a deferred consideration payment of $0.3m due in November 2021.

Other than the initial consideration already paid for The Edge and d-wise, there are no further financial obligations payable associated with the acquisitions until 2022, when deferred and contingent consideration will be due.

Sensitivity Analysis

The Company has considered three scenarios which are also linked to the company's risks when modelling the forecast results and cash flow. The sensitivity assessment includes the trading performance and cash flows of the Edge and d-wise from the date of the acquisitions.

(a) Base Case Scenario

The Group's detailed forecasts and projections, taking account of potential risks and uncertainties in the business, market and liquidity through sensitivity analysis, show that the Group has adequate resources to enable it to continue in operation through the forecast period ending 31 December 2022 from the approval date of these Consolidated Financial Statements. Accordingly, the Group continues to adopt the going concern basis in preparing its Consolidated Financial Statements.

The uncertainty as to the future impact on the Group of the recent COVID-19 outbreak has been considered as part of the sensitivity analysis and as part of Group's adoption of the going concern basis. Thus far we have not observed any material impact on our overall existing business or in the level of new business opportunities that are being presented to us in the markets in which we operate.

The Group has a significant proportion of recurring revenue (circa 60% of total) from annual support & maintenance and SaaS contracts from a well-established global customer base. Revenue is supported by a largely fixed cost base comprising staff and offices. The Group had net current assets (excluding deferred income) of £29.7m as of 31 December 2020 (2019: £10.0m). The deferred income recurs each year on renewal of contracts and in general the Group has either received the related cash or has raised invoices for the services. The Group had positive cash reserves of £26.7m at 31 December 2020, in addition to the £0.5m undrawn working capital facility, although £2.6m of the cash was held in bank accounts in China, where it has been traditionally harder to repatriate funds quickly. There are however no long-term restrictions on the transfer of funds from the Group bank accounts in China and since the 2020 year-end we have been able to repatriate £1.6m, significantly reducing our financial exposure to that territory.

(b) Sensitised Scenario

Further stress testing has been carried out to ensure that the Group has sufficient cash resources to continue its operations until at least 31 December 2022. In the downside scenario analysis performed, the Board considered the potential impact of the COVID-19 outbreak on the Group's results. In preparing this analysis the following key risks were included: COVID-19 causing a 25% loss of new business for the next twelve months and the risk effect of foreign exchange movements, particularly between the USD and GBP. Despite the negative impact of these sensitivities the model demonstrated that the Group remained viable, even though profitability and cash over the next twelve months was reduced.

The Group then considered a more extreme situation where the impact of its risks would be more severe such as a significant negative impact of COVID-19 continuing for an extended period of time into 2022, assuming there would be no new business at all. This sensitivity exercise resulted in the Group showing an operating loss in each of the years ending 31 December 2021 and 31 December 2022 and exhausting its cash reserves from October 2021, having not drawn its bank facility.

In a scenario where many of the identified risks occurred the Group would take remedial action to counter the dramatic reduction in profit and cash through a cost cutting and fund-raising exercise that would include staff redundancies, general cost control measures, office space reduction and seeking alternative sources of funding.

These downside scenarios are considered unlikely.

Even applying the extreme downside scenario sensitivity analysis throughout the forecast period to 31 December 2022, by taking sufficient remedial action we expect the Group to remain a going concern.

Conclusion and Going Concern Statement

After considering the uncertainties described above, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing this annual report and accounts.

SIGNIFICANT JUDGEMENTS AND ESTIMATES

In the process of applying the Group's accounting policies, which are described above, management have made judgements and estimations about the future that have the most significant effect on the amounts recognised in the financial statements. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

Significant judgements

The following judgments have the most significant effect on the financial statements.

Revenue Recognition

The Group generates revenue from the provision of software licences, annual support, SaaS subscriptions, subscription and support, professional services and technology enabled outsourced services. Software licences, professional services and annual support are often bundled together in a contract which do not meet the criteria to be distinct performance obligation, due to a lack of interdependence between performance obligations. Promises that are not distinct are combined with other promised goods or services in the contract, until a performance obligation is satisfied.

Judgement is applied in determining how many performance obligations there are within each contract and the period in which these obligations will be fulfilled and recognised as revenue, based on the Group's accounting policies. For SaaS subscription and support, the Group determines for each contract whether the promise is considered to be a single performance obligation as the subscription and support are highly interdependent on one another given that the customers are required to take the full package of both the software and support services i.e Instem would not be able to provide the support services without the provision of the software nor provide the software without the support services.

Impairment of goodwill

CGUs are identified by the fact they are separate legal entities and so have their own intangible and tangible assets, other current assets and generate cash from their products and services that are separately identifiable from one another. The judgements were made in respect of the WACC, the revenue growth rate applied and the allocation of costs across the CGUs.

The carrying value of goodwill must be assessed for impairment annually. This requires a value in use estimate which is dependent on estimation of future cashflows and the use of an appropriate discount rate to discount those cash flows to their present value. The carrying value of goodwill as at 31 December 2020 was £10.2m (2019: £10.2m).

Management approved to use the same pre-tax WACC across all CGUs, as it was determined based on the Groups risks and there were no specific risks related to each CGU or CGU's jurisdiction.

The revenue growth rates and margins are based on current Board-approved budgets and forecasts covering a period of five years. Management estimates are considering business growth rates, payroll and other cost base increases.

The data used for impairment testing procedures are directly linked to the Group's latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. The budgeted unallocated departmental costs are assigned to each CGU applying a standard methodology approved by the Board.

Development Costs

The Group invests on a continual basis in the development of software for sale to third parties. There is a continual process of enhancements to and expansion of the software with judgement required in assessing whether the development costs meet the criteria for capitalisation. These judgements have been applied consistently year on year. In making this judgement, the Group evaluates, amongst other factors, whether there are future economic benefits beyond the current period, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Judgement is therefore required in determining the practice for capitalising development costs.

Estimation uncertainty

Information about estimations and assumptions that may have the most significant impact on recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

Provision for liabilities

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the probable outflow of resources, and a reliable estimate can be made of the amount of the obligation. As at 31 December 2020, the Group has a provision of £0.25m (2019: £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 input received by the Group.

Contingent consideration

Where acquisition consideration includes consideration contingent on performance outcomes being met, the consideration is valued at the acquisition date based on performance forecasts available at the time. Those forecasts are reviewed at the reporting date and the consideration revised where materially different.

Impairment of other intangible assets

Other intangibles assets consist of assets acquired (customer relationships, intellectual property and brand names) as part of the net assets of certain subsidiaries and software, being mainly capitalised development costs. Impairment testing requires if there is an indication that the other intangible asset is impaired and the value in use method would be estimated based on an estimation of future cashflows and the use of an appropriate discount rate to discount those cash flows to their present value. The carrying amounts of acquired intangibles and software at the reporting date was £3.6m and £4.3m respectively (2019: £4.2m and £3.7m). There was an impairment charge of £0.7m on the year ended 31 December 2019.

Pension scheme

As stated above the Group operates a defined benefit pension scheme. At the end of each six-monthly reporting period the Group seeks external expert actuarial advice on the assumptions to apply to the calculation of the scheme's liabilities. The Group then engages a separate, independent firm of pension advisors to calculate the scheme surplus or deficit at the reporting date for accounting purposes. The scheme deficit at 31 December 2020 is £3.9m (2019: £1.8m).

Revenue Recognition

For Professional services and technology enabled outsourced services revenue recognition there is a significant estimation of the planned project hours, which determines the percentage of completion of service revenue contracts. Before the project is started, the project manager estimates the budgeted hours needed for the agreed services. If the project is expected to overrun, then the project manager will amend the expected budgeted hours in accordance with the new available information which also mitigates the risk of early revenue recognition.

2 REVENUE FROM CONTRACTS WITH CUSTOMERS

Segmental reporting

The Group has disaggregated revenue into various categories in the following tables which are intended to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Prior to 2019, the Group reported its business as one operating segment; Global Life Sciences. The Board managed the Group by monitoring its revenue streams and considered the cost base as a whole. Historically the Group's finance systems have recorded costs centrally and have managed costs in this way. Without systems capable of allocating costs accurately, the Board concluded that there was only one operating segment in which revenues and costs were reported. Over recent years the Group has expanded both organically and through acquisition, increasing the number of products and services. During 2019 the business was divided into three operating segments to better manage and report revenues; Study Management, Regulatory Solutions and In Silico Solutions.

There has been an ongoing project to enhance the quality of management information (MI) following the implementation of a new finance system. During the final quarter of 2019 certain direct costs were allocated to the revenue streams whilst the majority of costs were still recorded and reported centrally. The treatment in 2019 was based on information that was provided to the Instem Board, the Group's Chief Operating Decision Maker, at the end of 2019.

During 2020 the business implemented a process to more accurately allocate centrally held operational costs to the individual segments. However, it will take time for the allocations to be sufficiently accurate for the Board to use segmental cost information for meaningful decision making.

The operations of the Group are managed centrally with group-wide functions including sales and marketing, development, customer support, human resources and finance & administration.

The analysis provided below reflects costs directly attributable to the respective segments in 2020 and 2019, which are primarily third-party costs of sale and costs of allocated employees. The remaining indirect operational costs are accounted for centrally and are not allocated to specific segments.

SEGMENTAL REPORTING 2020	Study Management	Regulatory Solutions	In Silico Solutions		Total
	£000	£000	£000		£000

Total revenue	15,054	9,839	3,324		28,217
Direct attributable costs	(3,516)	(2,046)	(1,630)		(7,192)
	______	______	______		______
Contribution to indirect overheads	11,538	7,793	1,694		21,025

Central unallocated indirect costs					(15,106)
Adjusted EBITDA					______ 5,919

Depreciation					(138)
Amortisation of intangibles arising on acquisitions					(664)
Amortisation of internally generated intangibles					(736)
Amortisation of right of use assets					(572)
Impairment of goodwill and capitalised development costs					-
					______
OPERATING PROFIT BEFORE NON-RECURRING COSTS					3,809
Non-recurring costs					(606)
					______
OPERATING PROFIT AFTER NON-RECURRING COSTS					3,203

Finance income					38
Finance costs					(692)
					______
PROFIT BEFORE TAXATION					2,549

SEGMENTAL REPORTING 2019	Study Management	Regulatory Solutions	In Silico Solutions		Total

	£000	£000	£000		£000

Total revenue Direct attributable costs Contribution to indirect overheads	15,188 (4,370) ______ 10,818	9,037 (2,111) ______ 6,926	1,492 (660) ______ 832		25,717 (7,141) ______ 18,576
Central unallocated indirect costs					(13,712)
Adjusted EBITDA					______ 4,864

Depreciation					(155)
Amortisation of intangibles arising on acquisitions					(523)
Amortisation of internally generated intangibles Amortisation of right of use assets Impairment of goodwill and capitalised development costs					(755) (607) (3,175)
					______
OPERATING LOSS BEFORE NON-RECURRING COSTS					(351)
Non-recurring costs					(302)
					______
OPERATING LOSS AFTER NON-RECURRING COSTS					(653)

Finance income					7
Finance costs					(255)
					______
LOSS BEFORE TAXATION					(901)



REVENUE BY PRODUCT TYPE				2020 £000		2019 £000

Licence fees				3,477		3,501
Annual support fees				8,917		8,418
SaaS subscription and support fees				8,024		6,444
Professional services				1,603		1,773
Technology enabled outsourced services				6,196		5,581
				______		_______
				28,217		25,717

REVENUE BY GEOGRAPHICAL LOCATION	2020 £000	2019 £000
UK	2,740	3,414
Rest of Europe	5,656	5,051
North America	14,586	12,701
Rest of World	5,235	4,551
	______	______
	28,217	25,717

NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION BY GEOGRAPHICAL LOCATION	2020 £000	2019 £000
UK	17,549	17,779
Rest of Europe	1,436	1,107
North America	524	432
Rest of World	622	881
	______	______
	20,131	20,199

There were no customers which represented more than 10% of the Group revenue in 2020 (2019: none).

3 Non recurring costs

	2020 £000	2019 £000

Guaranteed Minimum Pension (GMP) equalisation provision Legal costs relating to historical contract disputes Acquisition costs	5 149 452	- 106 196

	606	302

4 Finance income

	2020 £000	2019 £000

Right of use asset interest income	7	-
Other interest	31	7

	38	7

5 Finance costs

	2020 £000	2019 £000

Loans and overdrafts	38	34
Unwinding discount on deferred consideration	70	-
Net interest charge on pension scheme	34	60
Lease interest cost	-	2
Right of use asset interest cost	96	118
Foreign exchange losses	454	41

	692	255

6 Taxation

Income taxes recognised in profit or loss:	2020 £000	2019 £000
Current tax:
UK corporation tax in respect of previous years	(4)	28
Adjustments in respect of R&D tax credit Foreign tax	250 (146)	464 (404)
Foreign tax in respect of previous years	39	67
	_______	_______
Total current tax credit	139	155
	_______	_______
Deferred tax:
Current year charge	(165)	(69)
Adjustment in respect of previous years	(57)	(11)
Retirement benefit obligation	(90)	(70)
Impact of rate change	(102)	-
	_______	_______
Total deferred tax charge	(414)	(177)
	_______	_______
Total income tax charge recognised in the current year	(275)	(22)

7 Leases

Nature of leasing activities in the capacity of lessee

The Group leases a number of offices in the jurisdictions from which it operates. In these jurisdictions the periodic rent is fixed over the lease term, with inflationary increases incorporated into the fixed payments stipulated in the lease agreements. Where rental agreements include market rate escalations, the lease liability is re-measured when the change in cash payments takes effect. The Group also leases certain vehicles. Leases of vehicles comprise only fixed payments over the lease terms. With the exception of short-term leases, leases of low value underlying assets and a lease held for a telephone system, with less than twelve months remaining on the lease as at 31 December 2020, each lease is reflected on the balance sheet as a right of use asset and a lease liability.

Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right of use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a termination fee. Some leases contain an option to extend the lease for a further term. For office leases the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease.

The table below describes the nature of the Groups leasing activities by type of right of use asset recognised on the balance sheet:


Right of use assets	No of right of use assets leased	Range of remaining term	No of leases with extension options	No of leases with options to purchase	No of leases with payments linked to an index	No of leases with termination options

Office buildings	10	2.7 years	9	0	1	0
Vehicles	3	2.9 years	0	0	0	0

Right of use assets	Land & buildings	Motor vehicles	Total
	£000	£000	£000

As at 1 January 2019	2,978	24	3,002
Derecognition of sublease Amortisation	(249) (590)	- (17)	(249) (607)
Exchange adjustment	19	-	19

As at 31 December 2019	2,158	7	2,165
Additions Lease modification and remeasurement	123 33	31 -	154 33
Amortisation Exchange adjustment	(564) (38)	(8) -	(572) (38)

As at 31 December 2020	1,712	30	1,742

Lease liabilities	Land & buildings		Motor vehicles	Total
	£000		£000	£000
As at 1 January 2019		3,020	22	2,569
Interest expense Lease payments	117 (676)		1 (17)	118 (693)
Exchange adjustment	102		-	102

As at 31 December 2019	2,563		6	2,569
Additions	123		31	154
Lease modification and remeasurement	32		-	32
Interest expense	95		-	95
Lease payments	(710)		(6)	(716)
Exchange adjustment	(50)		-	(50)
As at 31 December 2020	2,053		31	2,084

Reconciliation of movements of liabilities to cash flows arising from financing activities

Changes from financing cash flows	Land & buildings		Motor vehicles	Total
	£000		£000	£000

At 31 December 2019		676	17	693


Interest expenses	95		0	95
Payment of lease liabilities	615		6	621
	___		_	___
At 31 December 2020	710		6	716

Lease liability maturity analysis:

As at 31 December 2020

	1 year or less	2 to 5 years	After five years	Total
	£000	£000	£000	£000

Lease liabilities	488	1,538	58	2,084



As at 31 December 2019	1 year or less	2 to 5 years	After five years	Total
	£000	£000	£000	£000

Lease liabilities	565	1,950	54	2,569

The following amounts in respect of leases, where the company is a lessee, have been recognised in consolidated statement of comprehensive income:

	2020 £000	2019 £000
Expenses relating to short-term leases	45	21
Low value lease expense	95	7
Interest expense	95	118
Amortisation of right of use assets	572	607

The total cash outflow for leases in 2019 was £0.7m.

8 Earnings per share

Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option scheme. The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options. The diluted loss per share in 2019 is the same as basic loss per share with losses having an anti-dilutive effect.

2020

2019

Profit after tax

£000

Weighted average number of shares

'000

Profit per share

Pence

Loss after tax

£000

Weighted average number of shares

'000

Loss per share

Pence

Earnings per share - Basic

2,274

18,421

12.3

(923)

16,254

(5.7)

Potentially dilutive shares

1,231

799

_______

Earnings per share - Diluted

2,274

19,652

11.6

(923)

17,053

(5.7)

_______

Adjusted earnings per share

Adjusted earnings per share is calculated after adjusting for the effect of foreign currency exchange on the revaluation of inter-group balances included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised development and amortisation of intangibles on acquisitions. Diluted adjusted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option scheme. The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options.

	2020			2019
	Adjusted Profit after tax £000	Weighted average number of shares '000	Adjusted Earnings per share Pence	Adjusted Profit after tax £000	Weighted average number of shares '000	Adjusted Earnings per share Pence
Earnings per share - Basic	3,752	18,421	20.4	3,138	16,254	19.3
Potentially dilutive shares	-	1,231	-	-	799	-
	_______	_______	_______	_______	_______	_______
Earnings per share - Diluted	3,752	19,652	19.1	3,138	17,053	18.4
	_______	_______	_______	_______	_______	_______
				2020 £000		2019 £000
Reconciliation of adjusted profit before tax:
Reported profit/(loss) before tax				2,549		(901)
Non-recurring costs				606		302
Amortisation of acquired intangibles				664		523
Impairment of goodwill and capitalised development				-		3,175
Foreign exchange differences on revaluation of inter-group balances				208		61
				______		______
Adjusted profit before tax				4,027		3,160
Tax				(275)		(22)
				______		______
Adjusted profit after tax				3,752		3,138
				_____		_____
Profit/(loss) after tax				2,274		(923)
				___ ___		___ ___

9 Subsequent events

No adjusting events have occurred between the 31 December reporting date and the date of approval of these financial statements.

On 25 January 2021, Instem Information Systems (Shanghai) Limited signed a new 2-year office lease in Pudong New Area, Shanghai.

On 1 March 2021, Instem announced the acquisition of The Edge Software Consultancy Ltd ("The Edge"), a safety assessment software provider based in the UK. The Edge is focused on improving the efficiency of early-stage drug R&D, improving productivity and ensuring high-quality data capture. In the year ended 31 July 2020, The Edge had unaudited, normalised profits before tax of £1.7m on sales of £2.7m, of which £0.8m was recurring revenue. Its 2020 sales benefitted from high levels of professional services revenue, expected to be replaced by significant future growth in recurring software revenue. The consideration payable is up to £8.5m, payable as £6.0m initially, satisfied by £4.0m in cash from existing reserves and £2.0m via the issuance of 391,920 new ordinary shares in Instem plc, £0.5m of deferred consideration and up to a further £2.0m payable contingent on The Edge's future trading performance, both amounts payable in cash.

On 20 March 2021, Instem exchanged contracts to acquire US-based clinical trial technology & consulting leader d-Wise Technologies, Inc ("d-wise"). The acquisition was completed on 1 April 2021. d-wise adds a market leading position to the Group in an attractive adjacent area of clinical trial analysis and submission, with good future visibility through recurring revenue streams and already contracted, high value consultancy projects. In the year ended 31 December 2020 d-wise had unaudited adjusted profit before tax of $3.1m and adjusted EBITDA of $3.6m on sales of $24.1m. Approximately 30% of revenue was recurring SaaS, hosting services and software support and maintenance. As at 31 December 2020, d-wise had net assets of $4.8m. The combined strength of Instem & d-wise positions the enlarged Group as the foremost authority and driving force in generating, analysing and leveraging data from Discovery through late-stage Clinical Trials. The total consideration is up to $31m comprising $20m on completion, $8m of deferred consideration and up to a further $3m which is payable contingent upon the future financial performance of d-wise. The initial consideration on completion is being satisfied by $13m in cash and $7m via the issuance of 868,203 new ordinary shares of 10p each in Instem plc. The cash is being funded from the Group's existing financial resources.

The results of both acquisitions will be incorporated from the date of acquisition and will be disclosed in the half year results to 30 June 2021.

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