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Instem plc (INS)

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Monday 01 April, 2019

Instem plc

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

 

 

Financial Highlights:

 

·     Revenues increased 8% to £22.7m (2017 restated*: £21.1m)

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

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

 

"While our strategy remains focused on Instem's organic revenue growth, expanding operational gearing and improving positive cashflow, management will continue to consider complementary acquisition targets to further develop our position as a market leading provider of IT solutions to the global life sciences market."

 

 

For further information, please contact:

 

Instem plc

+44 (0) 1785 825 600

Phil Reason, CEO

Nigel Goldsmith, CFO

 

N+1 Singer (Nominated Adviser & Broker)

+44 (0) 20 7496 3000

Richard Lindley

Alex Bond

Rachel Hayes

 

Walbrook Financial PR

+44 (0) 20 7933 8780

Paul Cornelius

Sam Allen

Nick Rome

 

About Instem

 

 

Chairman's Statement

 

Results and impact of IFRS 15

 

Cash

 

Firm Foundations

 

Strategic Direction

·     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:

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;

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.

 

Summary

 

 

 

Chief Executive's Report

 

Strategic Development

Market Review

Study Management

Informatics

Regulatory Solutions

 

Regulatory Information Management

SEND

 

 

Financial Review

 

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

 

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.

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.

 

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.

 

 

 

 

 

2. Segmental Reporting

 

 

 

 

 

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

 

 

 

3. Reconciliation to previously reported information

 

 

 

 

As previously reported

 

 

IFRS 15 adoption

 

 

 

As Restated

 

Income statement for 2017

 

 

£000

£000

 

£000

 

REVENUE

 

(597)

 

21,071

 

Operating expenses

 

52

 

(18,497)

 

Share based payment

 

-

 

(157)

 

 

 

              

              

 

              

 

 

EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS ('EBITDA')

 

 

(545)

 

 

2,417

 

Depreciation and Amortisation

 

-

 

(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

 

 

 

 

Amounts excluding IFRS 15

 

 

IFRS 15 adoption

 

 

 

As reported

 

Income statement for 2018

 

 

£000

£000

 

£000

 

REVENUE

 

383

 

22,705

 

Operating expenses

 

(40)

 

(18,437)

 

Share based payment

 

-

 

(216)

 

 

 

              

              

 

              

 

 

EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS ('EBITDA')

 

 

343

 

 

4,052

 

Depreciation and Amortisation

 

-

 

(1,670)

 

 

 

              

 

              

 

 

PROFIT BEFORE NON-RECURRING COSTS

 

 

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)

 

 

 

              

              

         

 

 

 

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

 

 

    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

 

 

 

 

   

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

 

  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

 

 

   

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

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.

 

 


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