REG - Microgen PLC - Interim Results
RNS Number : 3670VMicrogen PLC23 July 201823 July 2018
MICROGEN plc ('Microgen' or 'Group')
INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2018
Microgen plc (LSE: MCGN), a leading provider of business critical software and services, reports its unaudited results for the six months ended 30 June 2018.
Group Highlights:
· The Group's two businesses have continued their strategic progress in 2018
· Aptitude Software has successfully commenced the transition from its focus on the Aptitude Revenue Recognition Engine to the growing opportunity with its latest application, the Aptitude Insurance Calculation Engine
· Microgen Financial Systems has continued to strengthen its focus on the Trust & Fund Administration sector by disposing of its small non-core Payments business in July 2018 for £6.9 million
· Group revenue growth of 23% to £34.9 million (H1 20171: £28.4 million), Organic Growth2 of 9% (11% on a Constant Currency3 basis)
· Group Adjusted Operating Profit4 increased by 12% to £7.4 million (H1 2017: £6.6 million). Group operating profit on a statutory basis increased 9% to £6.3 million (H1 2017: £5.7 million)
· Adjusted Basic Earnings per Share increased to 9.3 pence (H1 2017: 8.1 pence). Basic earnings per share increased to 7.8 pence (H1 2017: 7.0 pence)
· Interim dividend increased by 10% to 2.2 pence per share (2017: 2.0 pence per share)
· Strong balance sheet with cash of £11.6 million (H1 2017: £15.6 million) and net funds of £2.8 million (H1 2017: £6.9 million) in line with management's expectations following net corporate cash outflows of £10.9 million in the past 12 months (£3.8 million dividends and £7.1 million net acquisition consideration)
Aptitude Software:
· Sales of the strategically important Aptitude Insurance Calculation Engine to major insurers in both Asia and Europe
· Secured the first software-as-a-service sale of a core Aptitude Software application leveraging the recently acquired RevStream cloud platform
· On-going Recurring Revenue Base5 at 30 June 2018 has grown 42% since H1 2017 to £21.3 million (30 June 2017: £15.0 million and 31 December 2017: £19.3 million), Organic Growth of 23%
· In line with Aptitude Software's business focus, software revenue has increased 49% to £11.8 million (H1 2017: £7.9 million), Organic Growth of 25%
· Implementation services revenue growth of 17% to £13.6 million (H1 2017: £11.6 million), consistent with H1 2017 excluding the benefit of the RevStream acquisition. As expected demand moderated in the first half of the year as a result of the partner programme maturing, a number of the Aptitude Revenue Recognition Engine implementations nearing completion and the transition of Aptitude Software's focus to its latest applications
· Overall revenue growth of 30% to £25.4 million (H1 2017: £19.5 million), Organic Growth of 10% (14% on a Constant Currency basis)
· Continued development of Aptitude Software's high quality partner network with a number of significant alliances announced in the first half of the year
· Adjusted Operating Profit increase of 31% to £4.8 million (H1 2017: £3.7 million). Operating profit on a statutory basis of £4.4 million (H1 2017: £3.7 million)
· Good early progress with the Aptitude Insurance Calculation Engine achieved in the first half of 2018 both in terms of new business sales and pipeline development. The opportunity for this application remains significant with a number of material new business contracts targeted for the second half of 2018 and subsequent periods
Microgen Financial Systems:
· Disposal of the small non-core Payments business in July 2018 for £6.9 million further strengthening Microgen Financial Systems' focus and resources on Trust & Fund Administration which now represents 69% (H1 2017: 61%) of Continuing Revenues6
· Trust & Fund Administration revenues increased by 13% to £6.1 million (H1 2017: £5.4 million), Organic Growth of 10%
· Overall revenue increased by 7% to £9.5 million (H1 2017: £8.9 million) of which 75% is recurring in nature (H1 2017: 77%)
· Adjusted Operating Profit of £3.6 million (H1 2017: £3.8 million) as the transition to a business focussed on Trust & Fund Administration continues. Operating profit on a statutory basis of £3.0 million (H1 2017: £3.0 million)
· Resilient performance by the Application Management business in the period including the signing of several material multi-year contract extensions further strengthening future visibility
Contacts
Ivan Martin, Chairman 020-7496-8100
Philip Wood, Group Finance Director
James Melville-Ross / Darius Alexander 020-3727-1000
FTI Consulting
1 Throughout this report H1 2017 and FY 2017 comparatives have been restated as a result of changes in accounting policies, see note 19 for further information
2 Throughout this report Organic Growth percentages have been provided with the benefit of the acquisitions completed in 2017 removed
3 Throughout this report Constant Currency revenue and Constant Currency growth rates are calculated by comparing H1 2017 results with H1 2018 results retranslated at the rates of exchange prevailing during H1 2017
4 Throughout this report Adjusted Operating Profit, Adjusted Operating Margin and Adjusted Basic Earnings per Share exclude non-underlying operating items, unless stated to the contrary
5 Throughout this report On-Going Recurring Revenue Base includes recurring revenues contracted but yet to commence and excludes recurring revenues which are currently being received but are known to be terminating in the future
6 Throughout this report Continuing Revenue, Continuing Adjusted Operating Profit and Continuing Adjusted Operating Margin are adjusted to remove the contribution from Microgen Financial Systems' Payments business disposed of on 2 July 2018
Certain non-IFRS financial measures (e.g. Adjusted Operating Profit) are included which assist management in comparing performance on a consistent basis.
Overview:
The Group's two businesses have continued their strategic progress in 2018. Aptitude Software has successfully commenced the transition from its focus on the Aptitude Revenue Recognition Engine ('ARRE') to the growing opportunity with its latest application, the Aptitude Insurance Calculation Engine ('AICE'). Microgen Financial Systems has continued to strengthen its focus on the Trust & Fund Administration ('T&FA') sector by disposing of its small non-core Payments business in July 2018 for £6.9 million.
Aptitude Software's new business successes include sales of the strategically important AICE in both Asia and Europe to major insurance companies together with the first software-as-a-service sale of a core Aptitude Software application leveraging the recently acquired RevStream cloud platform. These successes have led to overall revenue growth by Aptitude Software of 30% to £25.4 million (H1 2017: £19.5 million), Organic Growth of 10% (14% on a Constant Currency basis). The Organic Growth has been achieved despite the expected moderation in demand for implementation services in H1 2018 as a result of the partner programme maturing, a number of the ARRE implementations nearing completion and the transition of Aptitude Software's focus to its latest applications.
Microgen Financial Systems' growing focus on T&FA has been strengthened further with the disposal of the small non-core Payments business in July 2018 for £6.9 million with T&FA now representing 69% of Continuing Revenues (H1 2017: 61%). T&FA revenues increased by 13% to £6.1 million (H1 2017: £5.4 million), Organic Growth of 10%. Additionally, the resilient Application Management business has secured several multi-year contract extensions further strengthening Microgen Financial Systems' excellent revenue visibility. Overall Microgen Financial Systems' revenue increased by 7% to £9.5 million (H1 2017: £8.9 million) of which 75% is recurring in nature (H1 2017: 77%).
The Group's continuing success is dependent upon its growing team of employees in Europe, North America and the Far East. As the scale and complexity of the Group has increased significant investment has been made in both developing the existing teams and strengthening both businesses by bringing in new senior talent.
Following a 25% increase in the total dividend for 2017, the interim dividend for 2018 will be increased by 10% to 2.2 pence (2017: 2.0 pence per share) which will be payable on 24 August 2018 to shareholders on the register at the close of business on 3 August 2018.
Both businesses have continued their strategic progress in 2018 and enter the second half of the year with an encouraging pipeline of opportunities targeted to contract in the second half of the year and subsequent periods. The timing of the conversion of these opportunities will determine the Group's future level of success.
Aptitude Software Report:
The Aptitude Software business provides a series of specialised financial management software applications which have the common capability of very rapidly processing very high volume complex, business event-driven transactions and calculations. Development continues to be performed principally at the Aptitude Technology Centre in Poland with sales, support and implementation services provided from Aptitude Software's London headquarters in addition to the North American and Singaporean offices. The business generates revenue from its software through a combination of licence fees (primarily annual recurring licences), software maintenance/support, software subscriptions for its cloud-based offerings and implementation services.
The highlights of the first half of 2018 are the new business sales of the Aptitude Insurance Calculation Engine ('AICE'). These new business successes have contributed to 30% growth in overall revenue to £25.4 million (H1 2017: £19.5 million), Organic Growth of 10% (14% on a Constant Currency basis). Benefitting from the increased revenues, Adjusted Operating Profit has increased by 31% to £4.8 million (H1 2017: £3.7 million) with Adjusted Operating Margin remaining at 19% (H1 2017: 19%) despite continued investment in the business. Operating profit on a statutory basis has increased to £4.4 million (H1 2017: £3.7 million).
New business contracts with major insurance companies have been secured in both Asia and Europe for AICE. This application enables insurers to address the requirements of IFRS 17, a new accounting standard focussed on insurance contracts which is effective for accounting periods commencing on or after 1 January 2021. The strategic opportunity for AICE is significant and these early successes are a key step towards the opportunity being realised demonstrating the credibility of Aptitude Software's technology to the wider insurance market.
In addition to the above successes the first software-as-a-service sale of a core application of Aptitude Software, the Aptitude Lease Accounting Engine ('ALAE'), was completed in the first half of 2018. ALAE allows organisations to address the requirements of IFRS 16 / ASC 842, the new leasing accounting standards effective for accounting periods commencing on or after 1 January 2019. The acceleration of Aptitude Software's cloud strategy was a key benefit targeted from the RevStream acquisition in August 2017 and the acquired RevStream cloud infrastructure will be leveraged for this new contract. There are several further cloud opportunities for Aptitude Software's core applications in the pipeline, again validating the RevStream acquisition. RevStream continues to perform in line with pre-acquisition expectations with further new business contracts secured in the first half of the year.
Aptitude Software continues to accelerate the development of its increasingly important partner programme, a programme that provides significant business development benefits. More advanced relationships with two of the 'big 4' global accountancy practices have been announced in the first half of 2018, whilst the programme has in parallel developed new technology alliances. In addition to the business development benefits, the partners perform a number of valuable roles on implementations with a focus on those project workstreams which provide clients' often complex data to Aptitude Software's applications.
The new business successes have resulted in the On-Going Recurring Revenue Base increasing to £21.3 million (30 June 2017: £15.0 million and 31 December 2017: £19.3 million), Organic Growth of 23%. In line with Aptitude Software's business focus, software revenue grew by 49% in the first half of 2018 to £11.8 million (H1 2017: £7.9 million), Organic Growth of 25%. The revenue recognised in the first half of 2018 benefitted from a small number of contracts which are known to either reduce or terminate in future periods and are therefore not included at their current value in the On-Going Recurring Revenue Base at 30 June 2018 of £21.3 million.
Implementation revenue has increased to £13.6 million (H1 2017: £11.6 million) benefitting from the RevStream acquisition in August 2017. Adjusting for the benefits from the acquisition implementation revenue is consistent with H1 2017, as anticipated demand moderated in H1 2018.
Investment continues throughout the business as the size and complexity of the Aptitude Software business increases. The AICE opportunity is significant with a number of geographically diverse opportunities requiring investment from Aptitude Software's business development and global client services resources. In addition, investment continues in Aptitude Software's cloud capability, product management and the Aptitude Technology Centre in Poland, as well as a number of client facing areas of the business to further strengthen the long term relationships with our customers.
In summary, the business continues to execute well on its strategy of focussing and leveraging its existing expertise in high volume transaction sectors by providing specialised financial management software applications to meet new accounting standards, regulations or business areas poorly served by ERP systems. Building further on the growth successfully achieved in recent years with ARRE the focus of the business has now turned to AICE. With two new business contracts with major insurance companies secured in the first half of 2018 for AICE, the business is confident of success with this new application with several opportunities targeted for the second half of the year and subsequent periods.
Microgen Financial Systems Report:
The Microgen Financial Systems business is continuing to make progress in achieving its strategic objective to increase the proportion of its revenues generated from the Trust & Fund Administration ("T&FA") sector, both through organic growth, add-on acquisitions and the disposal of non-core activities if satisfactory value can be realised. Microgen Financial Systems' key product in T&FA is Microgen 5Series which addresses the core operational requirements of a range of organisations including Trust Administrators, Fiduciary Companies, Corporate Services Providers and Fund Administrators. In addition to Microgen Financial Systems' T&FA operations, revenue is generated from an Application Management business covering a range of Microgen-owned and third-party systems principally focussed on the financial services industry. Up until July 2018, revenue was also generated from a Payments software business at which point this business was disposed. Microgen Financial Systems' revenues are generated through a combination of software licence fees (primarily annual recurring licences), software maintenance/support fees and professional services.
Microgen Financial Systems' key highlight in the year to date is the disposal on 2 July 2018 of its small non-core Payments business which operated in a market undergoing significant changes. Total cash consideration, received in July 2018, was £6.9 million. The Payments business generated revenue of £0.76 million in the first half of 2018 (H1 2017: £0.73 million) and £1.45 million in FY 2017. As a mature low growth business with higher margins the Payments business reported an operating profit of £0.56 million in the first half of 2018 (H1 2017: £0.53 million) and £1.05 million in FY 2017.
The disposal of the Payments business allows Microgen Financial Systems to further focus its resources on its T&FA business which, following the disposal, represents 69% of Continuing Revenues compared to 33% in 2014.
Including the contribution from the disposed Payments business, Microgen Financial Systems reported a 7% increase in total revenues to £9.5 million (H1 2017: £8.9 million) with Adjusted Operating Profit of £3.6 million (H1 2017: £3.8 million) representing an Adjusted Operating Margin of 37% (H1 2017: 43%). Operating profit on a statutory basis was £3.0 million (H1 2017: £3.0 million). Adjusting for the disposal of the Payments business, Microgen Financial Systems' Continuing Revenue in the first half of 2018 is £8.7 million (H1 2017: £8.1 million) with Continuing Adjusted Operating Profit of £3.0 million (H1 2017: £3.3 million) representing a Continuing Adjusted Operating Margin of 34% (H1 2017: 40%).
Investment in the T&FA business has continued in the first half of the year with the expectation that it will accelerate growth in the medium term. In addition to the increased investment in Microgen Financial Systems' leading product, Microgen 5Series, the business development and management teams have been strengthened with several senior hires. This investment, together with the change in mix between the growing T&FA business and the declining, but higher margin, Application Management business, has led to the reduction in margins in the first half of the year.
T&FA revenues have increased by 13% to £6.1 million (H1 2017: £5.4 million), of which Organic Growth was 10%. The T&FA On-Going Recurring Revenue Base has increased to £8.9 million (30 June 2017: £8.0 million, 31 December 2017: £8.8 million) with a number of well-qualified new business and upgrade opportunities targeted for the second half of the year.
The Application Management business has shown resilience in the first half of 2018 reporting revenue of £2.7 million (H1 2017: £2.8 million). During the first half of 2018 several contracts that represent a significant proportion of the continuing Application management revenue were extended for periods of up to five years although further reduction in revenues is expected over time.
Further acquisitions continue to be actively evaluated within T&FA, though fewer acquisition opportunities of direct competitors to Microgen 5Series, Microgen Financial Systems' key product within the wider T&FA market, remain as a result of the acquisitions made to date. The business is also appraising opportunities which offer the potential to leverage Microgen Financial Systems' existing technology into adjacent wealth management and fund administration sectors.
In summary, the disposal of the small non-core Payments business has further strengthened Microgen Financial Systems' focus on the T&FA sector. This increased focus, together with the recent investment in the T&FA business, provides further confidence that growth will be increased in future periods.
Group Financial Performance:
Overall revenue for the six months ended 30 June 2018 has increased by 23% to £34.9 million (H1 2017: £28.4 million), Organic Growth of 9%. On a Constant Currency basis revenue for the period was £35.7 million, Organic Growth of 11%. Adjusted Operating Profit for the period increased by 12% to £7.4 million (H1 2017: £6.6 million) with Adjusted Operating Profit on a Constant Currency basis of £7.6 million. Operating profit on a statutory basis was £6.3 million (H1 2017: £5.7 million) after non-underlying items of £1.2 million (H1 2017: £0.9 million) comprised principally of intangible amortisation. The Group reported a profit for the period attributable to equity shareholders of £4.8 million (H1 2017: £4.2 million). The Board has continued to determine that all internal research and development costs are expensed as incurred and therefore the Group has no capitalisation of development expenditure.
The total tax charge of £1.3 million (H1 2017: £1.3 million) represents 21.0% of the Group's profit before tax (H1 2017: 23.9%). The reduction in tax rate for 2018 is due to the benefits from the lower corporation tax rates in the US introduced in the second half of 2017.
The Group continues to have a strong balance sheet with net assets at 30 June 2018 of £56.5 million (H1 2017: £46.0 million), including cash at 30 June 2018 of £11.6 million (H1 2017: £15.6 million), and net funds at 30 June 2018 of £2.8 million (H1 2017: £6.9 million) following net corporate cash outflows of £10.9 million in the past 12 months (comprising dividends of £3.8 million and £7.1 million net acquisition consideration). Cash consideration of £6.9 million from the disposal of Microgen Financial Systems' Payments business was received in July 2018 and is not included in the cash balance of £11.6 million at 30 June 2018.
Trade receivables have increased 118% to £16.2 million (H1 2017: £7.4 million) due to a number of reasons including the impact of the Group's increasing revenue and the inclusion of a material multi-year invoice for an Aptitude Software client contracted in June 2018 (minimal revenue benefit in H1 2018). The Group's cash collection disciplines remain strong with DSO (debtor days) at 30 June 2018 of 52 consistent with prior periods (30 June 2017: 49). Deferred income has also increased significantly to £26.0 million (H1 2017: £18.5 million) due principally to the Group's increased recurring revenue base and the deferral of the multi-year invoice detailed above.
Pursuant to the above movements cash used in operations during the first half of the year was £1.1 million (H1 2017: cash generated from operations £0.9 million) which is consistent with the seasonal cash flow of the Group in which a significant proportion of its recurring revenue base is invoiced, and cash collected, in the second half of the financial year.
The Group has adopted IFRS 9, IFRS 15 and early adopted IFRS 16 and has restated its H1 2017 (operating profit on a statutory basis increased by 2.8%) and FY 2017 (operating profit on a statutory basis increased by 8.0%) comparatives within this statement. Further information on the impact of these new accounting standards is detailed within note 19.
Statement on Principal Risks and Uncertainties
Pursuant to the requirements of the Disclosure and Transparency Rules the Group provides the following information on its principal risks and uncertainties. The Group considers strategic, operational and financial risks and identifies actions to mitigate those risks. These risk profiles are updated at least annually. The principal risks and uncertainties detailed within the Group's 2017 Annual Report remain applicable for the first six months of the financial year. The Group's 2017 Annual Report is available from the Microgen website: www.microgen.com.
Related party transactions during the period are disclosed in Note 18.
CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT
For the six months ended 30 June 2018
Unaudited six months ended 30 Jun 2018
Unaudited six months ended 30 Jun 2017 Restated*
Audited year ended 31 Dec 2017
Restated*
Note
Before
Non-underlying items
Non-underlying items
Total
Before
Non-underlying items
Non-underlying items
Total
Before
Non-underlying items
Non-underlying items
Total
£000
£000
£000
£000
£000
£000
£000
£000
£000
Revenue
5
34,931
-
34,931
28,382
-
28,382
63,021
-
63,021
Operating costs
5/6
(27,499)
(1,156)
(28,655)
(21,766)
(877)
(22,643)
(48,518)
(2,541)
(51,059)
Operating profit
5/6
7,432
(1,156)
6,276
6,616
(877)
5,739
14,503
(2,541)
11,962
Finance income
5
18
-
18
7
-
7
13
-
13
Finance costs
5
(253)
-
(253)
(235)
-
(235)
(472)
-
(472)
Profit before income tax
7,197
(1,156)
6,041
6,388
(877)
5,511
14,044
(2,541)
11,503
Income tax expense
5/7
(1,511)
242
(1,269)
(1,532)
213
(1,319)
(2,447)
1,447
(1,000)
Profit for the period
5,686
(914)
4,772
4,856
(664)
4,192
11,597
(1,094)
10,503
Earnings per share
Basic
8
7.8p
7.0p
17.3p
Diluted
8
7.4p
6.7p
16.5p
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 30 June 2018
Unaudited
six months
ended
Unaudited
six months
ended
Audited
year
ended
30 Jun
2018
30 Jun
2017
Restated*
31 Dec
2017
Restated*
£000
£000
£000
Profit for the period
4,772
4,192
10,503
Other comprehensive income
Items that may subsequently be reclassified to profit or loss:
Fair value (loss)/ gain on hedged financial instruments
(186)
150
148
Currency translation difference
(551)
85
(40)
Other comprehensive income for the period, net of tax
(737)
235
108
Total comprehensive income for the period
4,035
4,427
10,611
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET
As at 30 June 2018
Note
Unaudited
as at
30 Jun 2018
Unaudited
as at
30 Jun 2017 Restated*
Audited
as at
31 Dec 2017 Restated*
ASSETS
£000
£000
£000
Non-current assets
Property, plant and equipment
11
5,630
5,290
5,543
Goodwill
52,801
41,774
52,801
Intangible assets
15,150
11,151
16,124
Other long-term assets
1,235
1,021
1,281
Deferred tax assets
1,441
904
1,421
76,257
60,140
77,170
Current assets
Trade and other receivables
12
19,148
10,398
13,752
Financial assets
- derivative financial instruments
8
184
218
Current income tax assets
502
-
733
Cash and cash equivalents
11,640
15,648
19,137
Total current assets
31,298
26,230
33,840
Total assets
107,555
86,370
111,010
LIABILITIES
Current liabilities
Financial liabilities
- borrowings
14
(2,040)
(3,000)
(2,040)
- derivative financial instruments
(108)
(98)
(37)
Trade and other payables
13
(32,827)
(24,095)
(37,411)
Capital lease obligations
15
(1,145)
(646)
(896)
Current income tax liabilities
(188)
(272)
(381)
Provisions
16
-
(24)
-
(36,308)
(28,135)
(40,765)
Net current liabilities
(5,010)
(1,905)
(6,925)
Non-current liabilities
Financial liabilities - borrowings
14
(6,798)
(5,750)
(7,778)
Capital lease obligations
15
(3,206)
(3,477)
(3,342)
Provisions
16
(401)
(293)
(404)
Deferred tax liabilities
(4,296)
(2,666)
(4,297)
(14,701)
(12,186)
(15,821)
NET ASSETS
56,546
46,049
54,424
CONDENSED CONSOLIDATED INTERIM BALANCE SHEET
As at 30 June 2018
Note
Unaudited
as at
30 Jun 2018
Unaudited
as at
30 Jun 2017 Restated*
Audited
as at
31 Dec 2017 Restated*
£000
£000
£000
SHAREHOLDERS' EQUITY
£000
Share capital
17
3,940
3,908
3,939
Share premium account
17
6,481
4,500
6,449
Capital redemption reserve
12,372
12,372
12,372
Other reserves
34,093
34,281
34,279
Retained earnings/ (accumulated losses)
114
(9,234)
(2,712)
Foreign currency translation reserve
(454)
222
97
TOTAL EQUITY
56,546
46,049
54,424
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 June 2018
Share capital
Share
premium accountRetained earnings/ (accumulated losses)
Foreign currency translation reserve
Capital redemption reserve
Other
reservesTotal
£000
£000
£000
£000
£'000
£000
£000
Balance at 31 December 2017 as originally presented
3,939
6,449
(3,251)
97
12,372
34,279
53,885
Change in accounting policies*
-
-
539
-
-
-
539
Restated total equity as at 1 January 2018
3,939
6,449
(2,712)
97
12,372
34,279
54,424
Comprehensive income
Profit for the period
-
-
4,772
-
-
-
4,772
Cash flow hedges
- net fair value losses
-
-
-
-
-
(186)
(186)
Exchange rate adjustments
-
-
-
(551)
-
-
(551)
Total comprehensive income for the period
-
-
4,772
(551)
-
(186)
4,035
Shares issued under share option schemes
1
32
-
-
-
-
33
Share options - value of employee service
-
-
642
-
-
-
642
Dividends to equity holders of the company
-
-
(2,588)
-
-
-
(2,588)
Total contributions by and distributions to owners of the company recognised directly into equity
1
32
(1,946)
-
-
-
(1,913)
Balance at 30 June 2018 (unaudited)
3,940
6,481
114
(454)
12,372
34,093
56,546
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 June 2017
Share capital
Share
premium accountAccumulated losses
Foreign currency translation reserve
Capital redemption reserve
Other
reservesTotal
£000
£000
£000
£000
£'000
£000
£000
Balance at 1 January 2017
3,811
4,498
(11,552)
137
12,372
34,131
43,397
Change in accounting policies*
-
-
(28)
-
-
-
(28)
Restated total equity as at 1 January 2017
3,811
4,498
(11,580)
137
12,372
34,131
43,369
Comprehensive income
Profit for the period (restated*)
-
-
4,192
-
-
-
4,192
Cash flow hedges
- net fair value gains
-
-
-
-
-
150
150
Exchange rate adjustments
-
-
-
85
-
-
85
Total comprehensive income for the period
-
-
4,192
85
-
150
4,427
Shares issued under share option schemes
97
2
-
-
-
-
99
Share options - value of employee service
-
-
282
-
-
-
282
Dividends to equity holders of the company
-
-
(2,128)
-
-
-
(2,128)
Total contributions by and distributions to owners of the company recognised directly in equity
97
2
(1,846)
-
-
-
(1,747)
Balance at 30 June 2017
(unaudited)
3,908
4,500
(9,234)
222
12,372
34,281
46,049
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOW
For the six months ended 30 June 2018
Unaudited
Unaudited
Audited
six months ended
six months ended
year
ended
Note
30 Jun 2018
30 Jun 2017
31 Dec 2017
Restated*
Restated*
£000
£000
£000
Cash flows from operating activities
Cash (used in)/ generated from operations
9
(1,098)
874
14,602
Interest paid
(253)
(235)
(472)
Income tax paid
(1,220)
(1,035)
(2,525)
Net cash flows (used in) / generated from operating activities
(2,571)
(396)
11,605
Cash flows from investing activities
Purchase of property, plant and equipment
(508)
(610)
(1,180)
Acquisition of subsidiaries, net of cash acquired
-
(3,342)
(10,460)
Interest received
18
7
13
Net cash used in investing activities
(490)
(3,945)
(11,627)
Cash flows from financing activities
Net proceeds from issuance of ordinary shares
17
33
99
106
Dividends paid to company's shareholders
10
(2,588)
(2,128)
(3,345)
Repayment of capital lease obligations
(666)
(384)
(895)
Repayments of loan
(1,000)
(1,500)
(12,250)
Drawdown of loan
-
-
11,818
Net cash used in financing activities
(4,221)
(3,913)
(4,566)
Net decrease in cash and cash equivalents
(7,282)
(8,254)
(4,588)
Cash and cash equivalents at beginning of period
19,137
23,849
23,849
Exchange rate (losses)/ gains on cash and cash equivalents
(215)
53
(124)
Cash and cash equivalents at end of period
11,640
15,648
19,137
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General information
Microgen plc (the 'Company') and its subsidiaries (together, the 'Group') is a provider of business critical software and services.
The Company is a public limited company incorporated and domiciled in England and Wales with a primary listing on the London Stock Exchange. The address of its registered office is Old Change House, 128 Queen Victoria Street, London, England, EC4V 4BJ.
These condensed consolidated interim financial statements were approved for issue on 20 July 2018.
These condensed consolidated interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 were approved by the Board of directors on 7 March 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.
These condensed consolidated interim financial statements have been reviewed, not audited.
2. Basis of preparation
These condensed consolidated interim financial statements for the six months ended 30 June 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. These condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2017, which have been prepared in accordance with IFRSs as adopted by the European Union.
After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Although the Group is operating in a net current liability position at the balance sheet date the Group retains significant cash balances benefitting from its annual licence fee model in which the overwhelming majority of its customers pay annually in advance. The Group therefore continues to adopt the going concern basis in preparing its condensed consolidated interim financial statements.
3. Accounting policies
The accounting policies adopted are consistent with those of the previous financial statements and corresponding interim report period, except for the estimation of income tax (see note 7) and the adoption of new and amended standards as set out below.
(a) New standards, interpretations and amendments effective from 1 January 2018
A number of new or amended standards became applicable for the current reporting period and the Group had to change its accounting policies and make retrospective adjustments as a result of adopting the following standards:
· IFRS 9 'Financial instruments', and
· IFRS 15 'Revenue from Contracts with Customers'
The impact of the adoption of these standards and the new accounting policies are disclosed in note 19. The other standards did not have any impact on the Group's accounting policies and did not require retrospective application.
3. Accounting policies (continued)
(b) New standards and interpretations that have been early adopted
IFRS 16 'Leasing' replaces IAS 17 and is mandatory for annual reporting periods beginning on or after 1 January 2019. The Group has taken the decision to early adopt with an effective date from 1 January 2018 and make retrospective adjustments. The impact of this early application and the new accounting policy is disclosed in note 19.
4. Estimates
The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017, with the exception of changes in estimates that are required in determining the provision for income taxes.
Fair value estimation
Financial instruments not measured at fair value
Financial instruments not measured at fair value includes cash and cash equivalents, trade and other receivables, trade and other payables, and loans and borrowings, however, due to their short term nature and ability to be liquidated at short notice their carrying value approximates their fair value.
Financial instruments measured at fair value
The fair value hierarchy of the financial instruments measured at fair value is provided below.
Level 2 inputs
Unaudited
six months
ended
30 Jun 2018£'000
Unaudited
six months
ended
30 Jun 2017
£'000
Financial assets
Derivative financial assets (designated hedge instruments)
8
184
8
184
Financial liabilities
Derivative financial liabilities (designated hedge instruments)
(108)
(98)
(108)
(98)
The derivative financial assets and liabilities have been valued using the market approach and are considered to be Level 2 inputs. There were no changes to the valuation techniques used in the year. There were no transfers between levels during the year.
5. Segmental information
The Board of Microgen plc (the "Board") has determined the operating segments based on the reports it receives from management to make strategic decisions.
The segmental analysis is split into the Aptitude Software and Microgen Financial Systems operating businesses, the chief operational decision makers for the two businesses are Tom Crawford (Aptitude Software) and Simon Baines (Microgen Financial Systems).
The operating businesses are allocated central function costs in arriving at operating profit/(loss). Group overhead costs are not allocated into the operating businesses as the Board believes that these relate to Group activities as opposed to the operating businesses.
There has been no material change in total assets or total liabilities from the amounts disclosed in the last annual financial statements.
Unaudited six months ended
30 Jun 2018
Aptitude Software
Microgen Financial Systems
Group
Total
£000
£000
£000
£000
Revenue
25,423
9,508
-
34,931
Operating costs
(20,576)
(5,943)
-
(26,519)
Operating profit before Group overheads
4,847
3,565
-
8,412
Unallocated Group overheads
(980)
(980)
Operating profit before non-underlying items
7,432
Non-underlying items
(464)
(598)
(94)
(1,156)
Operating profit / (loss)
4,383
2,967
(1,074)
6,276
Finance income
18
Finance cost
(253)
Profit before tax
6,041
Income tax expense
(1,269)
Profit for the period
4,772
5. Segmental information (continued)
Unaudited six months ended
30 Jun 2017 Restated*
Aptitude Software
Microgen Financial Systems
Group
Total
£000
£000
£000
£000
Revenue
19,517
8,865
-
28,382
Operating costs
(15,829)
(5,080)
-
(20,909)
Operating profit before Group overheads
3,688
3,785
-
7,473
Unallocated Group overheads
(857)
(857)
Operating profit before non-underlying items
6,616
Non-underlying items
-
(811)
(66)
(877)
Operating profit / (loss)
3,688
2,974
(923)
5,739
Finance income
7
Finance cost
(235)
Profit before tax
5,511
Income tax expense
(1,319)
Profit for the period
4,192
Audited year ended
31 Dec 2017 Restated*
Aptitude Software
Microgen Financial Systems
Group
Total
£000
£000
£000
£000
Revenue
44,721
18,300
-
63,021
Operating costs
(36,102)
(10,765)
-
(46,867)
Operating profit before Group overheads
8,619
7,535
-
16,154
Unallocated Group overheads
(1,651)
(1,651)
Operating profit before non-underlying items
14,503
Non-underlying items
(829)
(1,398)
(314)
(2,541)
Operating profit / (loss)
7,790
6,137
(1,965)
11,962
Finance income
13
Finance cost
(472)
Profit before tax
11,503
Income tax expense
(1,000)
Profit for the period
10,503
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
6. Non-underlying items
Unaudited
six monthsended 30 Jun 2018
Unaudited
six months
ended 30 Jun 2017
Audited
year
ended 31 Dec 2017
£000
£000
£000
Amortisation of intangibles
970
616
1,316
Share based payments on share options
issued in 2013
60
66
115
Costs in relation to replacement credit facility
-
-
199
Acquisition and associated restructuring costs
126
195
911
1,156
877
2,541
7. Income tax expense
Income tax expense is recognised based on management's estimate of the weighted average income tax rate expected for the full financial year of 21% (the estimated tax rate for the six months ended 30 June 2017 was 24%).
8. Earnings per share
Unaudited six months ended
30 Jun 2018
Unaudited six months ended 30 Jun 2017 Restated*
Audited
year ended
31 Dec 2017
Restated*
pence
pence
pence
Earnings per share
Basic
7.8
7.0
17.3
Diluted
7.4
6.7
16.5
Adjusted earnings per share
Basic
9.3
8.1
18.0
Diluted
8.8
7.8
17.2
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
8. Earnings per share (continued)
To provide an indication of the underlying operating performance the adjusted earnings per share calculation above excludes intangible amortisation and other non-underlying items and has a tax charge based on the effective rate.
Unaudited six months ended
30 Jun 2018
Unaudited six months ended 30 Jun 2017 Restated*
Audited
year ended
31 Dec 2017 Restated*
pence
pence
pence
Basic earnings per share
7.8
7.0
17.3
Non-underlying items
1.5
1.1
1.8
Prior years' tax credit
-
-
(0.5)
Tax losses recognised
-
-
(0.6)
Adjusted earnings per share
9.3
8.1
18.0
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
9. Cash generated from operations
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017 Restated*
Audited
year
ended
31 Dec 2017 Restated*
£000
£000
£000
Profit before tax for the period
6,041
5,511
11,503
Adjusted for:
Depreciation
938
665
1,528
Amortisation
970
616
1,316
Share-based payment expense
642
282
796
Finance income
(18)
(7)
(13)
Finance costs
253
235
472
Changes in working capital:
Increase in receivables
(5,614)
(1,698)
(3,974)
(Decrease) / increase in payables
(4,307)
(4,737)
2,881
(Decrease) / increase in provisions
(3)
7
93
Cash (used in)/ generated from operations
(1,098)
874
14,602
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
10. Dividends
The interim dividend of 2.2 pence per share (2017: 2.0 pence per share) was approved by the Board on 20 July 2018. It is payable on 24 August 2018 to shareholders on the register at 3 August 2018. This interim dividend, amounting to £1,340,000 (2017: £1,217,000), has not been included as a liability in this interim financial information. It will be recognised in shareholders' equity in the year to 31 December 2018.
The dividend that relates to the period to 31 December 2017 and that amounted to £2,588,000 (2016: final dividend £2,128,000) was paid in May 2018.
11. Property, plant and equipment
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017 Restated*
£000
£000
Opening net book amount 1 January
5,543
4,490
Additions
1,027
1,432
Acquired through acquisitions
-
25
Net disposals
(34)
(8)
Exchange movements
32
16
Depreciation
(938)
(665)
Closing net book amount 30 June (unaudited)
5,630
5,290
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
The Group has not placed any contracts for future capital expenditure which have not been provided for in the financial statements.
12. Trade and other receivables
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017 Restated*
£000
£000
Trade receivables - net
16,164
7,427
Other receivables
1,158
650
Prepayments and accrued income
1,826
2,321
Closing net book amount 30 June (unaudited)
19,148
10,398
Within the trade receivables balance of £16,164,000 (30 June 2017: £7,427,000) there are balances totalling £2,840,000 (30 June 2017: £2,363,000) which, at 30 June 2018 were overdue for payment.
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
13. Trade and other payables
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017 Restated*
£000
£000
Trade payables
1,243
741
Other tax and social security payable
1,150
839
Other payables
205
137
Accruals
4,243
3,902
Deferred income
25,986
18,476
Closing net book amount 30 June (unaudited)
32,827
24,095
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
14. Financial liabilities
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017
£000
£000
Bank Loan
8,838
8,750
The borrowings are repayable as follows:
Within one year
2,040
3,000
In the second year
2,040
5,750
In the third to fifth years inclusive
4,920
-
9,000
8,750
Unamortised prepaid facility arrangement fees
(162)
-
As at 30 June
8,838
8,750
15. Capital lease obligations
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017 Restated*
£000
£000
Amounts payable under capital lease arrangements:
Within one year
1,292
839
Within two to five years
2,756
2,910
After five years
735
872
Total
4,783
4,621
Less: future finance charges
(432)
(498)
Present value of lease obligations
4,351
4,123
Less: Amount due for settlement within 12 months (shown under current liabilities
(1,145)
(646)
As at 30 June
3,206
3,477
* See note 19 for details regarding the restatement as a result of a change in accounting policies.
16. Provisions for other liabilities and charges
Unaudited
six months ended
30 Jun 2018
Unaudited
six monthsended
30 Jun 2017
£000
£000
At 1 January
404
310
Exchange movements
(3)
7
At 30 June
401
317
Provisions have been analysed between current and non-current as follows:
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017
£000
£000
Current
-
24
Non-current
401
293
At 30 June
401
317
£365,000 of the total provision at 30 June 2018 of £401,000 relates to the cost of dilapidations in respect of its occupied leasehold premises.
17. Share capital
Unaudited
six months ended
30 Jun 2018Unaudited
six months ended
30 Jun 2017Ordinary share capital at 6 3/7 pence each
Number of shares
Ordinary Shares
Number
of shares
Ordinary Shares
000
£000
000
£000
Issued and fully paid:
Opening balance as at 1 January
60,878
3,913
59,297
3,811
Shares issued under share option schemes
17
1
1,529
97
At 30 June (unaudited)
60,895
3,914
60,826
3,908
Shares to be issued
Deferred equity consideration on acquisition
399
26
-
-
Closing balance as at 30 June (unaudited)
61,294
3,940
60,826
3,908
Employee share option scheme: options were exercised during the period to 30 June 2018 resulting in 16,665 shares being issued (30 June 2017: 1,529,339), with exercise proceeds of £33,000 (30 June 2017: £99,000). The related weighted average share price at the time of exercise was £4.33 per share (30 June 2017: £2.34).
Share premium
Unaudited
six months ended
30 Jun 2018
Unaudited
six months ended
30 Jun 2017
£000
£000
Opening balance as at 1 January
6,449
4,498
Movement in relation to share options exercised
32
2
Closing balance as at 30 June (unaudited)
6,481
4,500
18. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
During 2018, the Group entered into transactions with a subsidiary of FDM Group (Holdings) plc, a company for which Ivan Martin (Chairman) and Peter Whiting (Non-Executive Director) are current Non-Executive Directors. FDM Group (Holdings) plc provided software development and other technical services to the Group during the six month period ended 30 June 2018 at a cost of £43,000 (Six months ended 30 June 2017: £22,000).
During 2018, the Group entered into transactions with Phoenix Johnson Ltd, a company for which Naomi Johnson (an experienced facility management professional), the wife of Tom Crawford (Director), is both the sole shareholder and an employee. Phoenix Johnson Ltd provided facility management consultancy services to Microgen plc during the six month period ended 30 June 2018 at a cost of £40,000. No equivalent transaction occurred during the six month period ended 30 June 2017.
There were no other related party transactions during the six month period ended 30 June 2018 (30 June 2017: £nil), as defined by International Accounting Standard No 24 'Related Party Disclosures', except for key management compensation. The related party transactions for the year ended 31 December 2017 as defined by International Accounting Standard No 24 'Related Party Disclosures' are disclosed in note 28 of the Microgen plc Annual Report for the year ended 31 December 2017.
19. Changes in accounting policies
This note explains the impact of the adoption of IFRS 9 'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leasing' on the Group's financial statements together with the new accounting policies that have been applied from 1 January 2018 where they are different to those applied in prior periods.
19(a) Impact on financial statements
As a result of the changes in the Group's accounting policies the prior year financial statements have been restated. The tables on the following pages summarise the impact of the adjustments which are explained in more detail in section 19(b). The new accounting policies where relevant are provided in section 19(c).
19. Changes in accounting policies (continued)
Condensed consolidated income statement extracts
30 Jun 2017
As originally presented
IFRS 15
IFRS 16
Unaudited
30 Jun 2017
Restated
£000
£000
£000
£000
Revenue
28,350
32
-
28,382
Operating costs
(22,768)
10
115
(22,643)
Operating profit
5,582
42
115
5,739
Finance income
7
-
-
7
Finance costs
(164)
-
(71)
(235)
Profit before income tax
5,425
42
44
5,511
Income tax expense
(1,298)
(10)
(11)
(1,319)
Profit for the period
4,127
32
33
4,192
Earnings per share
Basic
6.9p
-
0.1p
7.0p
Diluted
6.7p
-
-
6.7p
31 Dec 2017
As originally presented
IFRS 15
IFRS 16
Unaudited
31 Dec 2017
Restated
£000
£000
£000
£000
Revenue
62,640
381
-
63,021
Operating costs
(51,560)
271
230
(51,059)
Operating profit
11,080
652
230
11,962
Finance income
13
-
-
13
Finance costs
(316)
-
(156)
(472)
Profit before income tax
10,777
652
74
11,503
Income tax expense
(841)
(150)
(9)
(1,000)
Profit for the period
9,936
502
65
10,503
Earnings per share
Basic
16.4p
0.7p
0.2p
17.3p
Diluted
15.6p
0.7p
0.2p
16.5p
19. Changes in accounting policies (continued)
Condensed consolidated balance sheet extracts
30 Jun 2017
As originally presented
IFRS 15
IFRS 16
Unaudited
30 Jun 2017
Restated
ASSETS
£000
£000
£000
£000
Non-current assets
Property, plant and equipment
1,649
-
3,641
5,290
Other long-term assets
-
1,021
-
1,021
Deferred income tax assets
741
63
100
904
55,315
1,084
3,741
60,140
Current assets
Trade and other receivables
10,288
110
-
10,398
26,120
110
-
26,230
Total assets
81,435
1,194
3,741
86,370
LIABILITIES
Current liabilities
Trade and other payables
(23,497)
(598)
-
(24,095)
Capital lease obligations
-
-
(646)
(646)
(26,891)
(598)
(646)
(28,135)
Net current (liabilities)/assets
(771)
(488)
(646)
(1,905)
Non-current liabilities
Deferred income tax liabilities
(2,489)
(166)
(11)
(2,666)
Capital lease obligations
-
-
(3,477)
(3,477)
(8,532)
(166)
(3,488)
(12,186)
NET ASSETS
46,012
430
(393)
46,049
SHAREHOLDERS' EQUITY
(Accumulated losses)/ retained earnings
(9,271)
430
(393)
(9,234)
TOTAL EQUITY
46,012
430
(393)
46,049
The above table details line items within the condensed consolidated balance sheet which have been subject to adjustment as a result of the changes in accounting policies. Line items unaffected by the changes have not been included.
19. Changes in accounting policies (continued)
Condensed consolidated balance sheet extracts (continued)
31 Dec 2017
As originally presented
IFRS 15
IFRS 16
Unaudited
31 Dec 2017
Restated
ASSETS
£000
£000
£000
£000
Non-current assets
Property, plant and equipment
1,825
-
3,718
5,543
Other long-term assets
-
1,281
-
1,281
Deferred income tax assets
1,336
(6)
91
1,421
72,086
1,275
3,809
77,170
Current assets
Trade and other receivables
13,363
389
-
13,752
33,451
389
-
33,840
Total assets
105,537
1,664
3,809
111,010
LIABILITIES
Current liabilities
Trade and other payables
(36,952)
(527)
68
(37,411)
Capital lease obligations
-
-
(896)
(896)
(39,410)
(527)
(828)
(40,765)
Net current (liabilities)/assets
(5,959)
(138)
(828)
(6,925)
Non-current liabilities
Deferred income tax liabilities
(4,060)
(237)
-
(4,297)
Capital lease obligations
-
-
(3,342)
(3,342)
(12,242)
(237)
(3,342)
(15,821)
NET ASSETS
53,885
900
(361)
54,424
SHAREHOLDERS' EQUITY
(Accumulated losses)/ retained earnings
(3,251)
900
(361)
(2,712)
TOTAL EQUITY
53,885
900
(361)
54,424
The above table details line items within the condensed consolidated balance sheet which have been subject to adjustment as a result of the changes in accounting policies. Line items unaffected by the changes have not been included.
19. Changes in accounting policies (continued)
Condensed consolidated cash flow statement extracts
30 Jun 2017
As originally presented
IFRS 16
Unaudited
30 Jun 2017
Restated
£000
£000
£000
Cash flows from operating activities
Cash generated from operations
419
455
874
Interest paid
(164)
(71)
(235)
Net cash (used in)/ generated from operating activities
(780)
384
(396)
Cash flows from investing activities
Net cash used in investing activities
(3,945)
-
(3,945)
Cash flows from financing activities
Repayment of capital lease obligations
-
(384)
(384)
Net cash used in financing activities
(3,529)
(384)
(3,913)
Net decrease in cash and cash equivalents
(8,254)
-
(8,254)
Cash and cash equivalents at beginning of period
23,849
-
23,849
Exchange rate gains on cash and cash equivalents
53
-
53
Cash and cash equivalents at end of period
15,648
-
15,648
The above table details line items within the condensed consolidated cash flow statement which have been subject to adjustment as a result of the changes in accounting policies. Line items unaffected by the changes have not been included.
19. Changes in accounting policies (continued)
Condensed consolidated cash flow statement extracts (continued)
31 Dec 2017
As originally presented
IFRS 16
Unaudited
31 Dec
Restated
£000
£000
£000
Cash flows from operating activities
Cash generated from operations
13,551
1,051
14,602
Interest paid
(316)
(156)
(472)
Net cash generated from operating activities
10,710
895
11,605
Cash flows from investing activities
Net cash used in investing activities
(11,627)
-
(11,627)
Cash flows from financing activities
Repayment of capital lease obligations
-
(895)
(895)
Net cash used in financing activities
(3,671)
(895)
(4,566)
Net decrease in cash and cash equivalents
(4,588)
-
(4,588)
Cash and cash equivalents at beginning of period
23,849
-
23,849
Exchange rate losses on cash and cash equivalents
(124)
-
(124)
Cash and cash equivalents at end of period
19,137
-
19,137
The above table details line items within the condensed consolidated cash flow statement which have been subject to adjustment as a result of the changes in accounting policies. Line items unaffected by the changes have not been included.
19. Changes in accounting policies (continued)
19(b) Impact of adoption
IFRS 9
IFRS 9 'Financial instruments' replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.
The adoption of IFRS 9 'Financial Instruments' from 1 January 2018 resulted in changes in accounting policies but no adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in note 19(c) below. In accordance with the transitional provisions in IFRS 9(7.2.15) and (7.2.26), comparative figures have not been restated.
IFRS 15
The Group has adopted IFRS 15 'Revenue from Contracts with Customers' from 1 January 2018 which has resulted in changes in accounting policies and adjustments to the amounts recognised in prior year financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new accounting policies retrospectively and has restated comparatives for the 2017 financial year.
The income statement impact on each of the Group's operating segments for the six months ended 30 June 2017 and the year ended 31 December 2017 is summarised below:
Six months ending 30 June 2017
IFRS 15 adjustments
Ref
As
originally presented*
30 Jun 17
£000
Aptitude Software
£000
Microgen Financial Systems
£000
Group
£000
Unaudited IFRS 15
30 Jun Restated*
£000
Revenue
(i)
28,350
32
-
-
28,382
Operating costs
(ii)
(22,768)
14
(4)
-
(22,758)
Income tax expense
(iii)
(1,298)
(11)
1
-
(1,308)
Year ending 31 December 2017
IFRS 15 adjustments
Ref
As
originally presented*
31 Dec 17
£000
Aptitude Software
£000
Microgen Financial Systems
£000
Group
£000
Unaudited IFRS 15
31 Dec Restated*
£000
Revenue
(i)
62,640
381
-
-
63,021
Operating costs
(ii)
(51,560)
270
1
-
(51,289)
Income tax expense
(iii)
(841)
(150)
-
-
(991)
*The amounts in the tables above do not include the adjustments from the adoption of IFRS 16
19. Changes in accounting policies (continued)
In addition, the following adjustments were made to the amounts recognised in the condensed consolidated balance sheet at the date of initial application (1 January 2018):
Ref
As originally presented*
31 Dec 17
£000
Re-measurements
£000
Unaudited IFRS 15 carrying amount
1 Jan 18
£000
Other long-term assets
(ii)
-
1,281
1,281
Trade and other receivables
(i)
13,363
389
13,752
Deferred tax asset
(iii)
1,336
(6)
1,330
Trade and other payables
(i)/(ii)
(36,952)
(527)
(37,479)
Deferred tax liability
(iii)
(4,060)
(237)
(4,297)
*The amounts in the tables above do not include the adjustments from the adoption of IFRS 16
The impact on the Group's retained earnings as at 1 January 2018 and 1 January 2017 is as follows:
2018
2017
Ref
£000
£000
Closing retained earnings 31 December as originally presented
(3,251)
(11,552)
Recognition of revenue
(i)
(138)
(519)
Commission recognised on new customer contracts
(ii)
1,281
1,010
Movement in deferred tax
(iii)
(243)
(93)
Adjustment to retained earnings from adoption of IFRS 15
900
398
Opening retained earnings 1 January - IFRS 15
(2,351)
(11,154)
(i) Recognition of software licence and maintenance revenues
The Group's revenue contracts overwhelmingly include the provision of licenced software where enhancement of the core software over time represents an integral part of the obligation to our customers. For Aptitude Software products this enhancement typically involves significant ongoing optimisation of functionality and performance for its users. For Microgen 5Series, the key product of Microgen Financial Systems, the enhancements typically provide mission-critical and timely regulatory functionality. These enhancements are essential for the ongoing compliance of its users and their clients.
These material ongoing enhancement obligations have historically been the reason why the significant majority of our products are structured around annual licence fees for which revenue has been recognised over time in prior periods. Further information in respect of the accounting policies governing the recognition of software licence and maintenance revenues in previous reporting periods is detailed at page 74 of the 2017 Annual Report.
19. Changes in accounting policies (continued)
IFRS 15 requires an entity to evaluate whether the ongoing obligations represent a performance obligation that is distinct from the licence. If not distinct the combined performance obligation is evaluated against recognition over time criteria. If the licence is distinct it is recognised separately from the other performance obligations.
The Group's evaluation of this judgement for Aptitude Software products and Microgen 5Series is further explained below.
Aptitude Software products
Aptitude Software's specialised financial management software applications require optimisation of functionality and performance in the initial years of their use to ensure that the applications continue to meet the requirements of the users. This requirement is due to the significant complexity of the applications which specialise in very rapidly processing very high volume complex, business event-driven transactions and calculations. As a result, the Group has concluded that the software licence and the optimisation services are not distinct from each other during the period in which the functionality is being optimised and should be combined to create a single performance obligation ('Combined Performance Obligation'). The Group's evaluation is that the Combined Performance Obligation meets the criteria for revenue to be recognised over time as the services are significantly modifying and optimising the software the customer controls.
The transfer of the Combined Performance Obligation is considered complete when the intense functionality enhancement activity in the initial years diminishes to a consistent level of ongoing maintenance obligation which is delivered through either annual maintenance charges or annual licence fees.
In determining the most appropriate method of recognising revenue over time, the Group has concluded that the Combined Performance Obligation will be recognised in line with development activity related to the relevant product over the period in which the enhancements are required by the particular user.
Consequently, the adoption of IFRS 15 to Aptitude Software's revenue from customer contracts has resulted in additional revenue being recognised totalling £32,000 and £108,000 for the six months ended 30 June 2017 and 30 June 2018 respectively (year ending 31 December 2017 additional revenue recognised of £381,000).
The Group's net asset position reduced by £138,000 on 1 January 2018 (£519,000 lower on 1 January 2017) as a result of this adoption.
Microgen 5Series
Microgen 5Series, the leading product of Microgen Financial Systems, is focused on the Trust & Fund Administration market. A core requirement of Microgen 5Series is to enable its users, and in turn their customers, to remain compliant with multiple significant financial industry regulations. The Microgen team expends considerable effort ensuring that the product remains up to date with changing regulations across multiple jurisdictions. Should this effort not be expended, and the product consequently fails to be kept updated, the risk to customers would be such that they would be unlikely to continue to use the product. As a result of this need for ongoing material modification to the product's functionality, the Group considers that the two promises in a typical contract (the software licence and the maintenance services) should be combined to create a Combined Performance Obligation, the revenue relating to which is recognised over time. With revenue continuing to be recognised over time the adoption of IFRS 15 does not result in any restatement of revenues recognised in previous reporting periods.
19. Changes in accounting policies (continued)
(ii) Commission recognised on software licence sales
In previous reporting periods, commission incurred on software licence sales would be recognised in full as and when it fell due. Under the adoption of IFRS 15, the Group's assessment is that these commissions meet the definition of incremental costs of obtaining a contract. As a result, an asset is required to be recognised which will typically be amortised across the expected contract life of each client.
To reflect this change in policy, the Group has recognised a reduction in its commission related costs of £10,000 and an increase of £20,000 for the six months ended 30 June 2017 and 30 June 2018 respectively (year ending 31 December 2017 reduction in commission costs of £271,000).
The Group's net asset position improved by £1,281,000 on 1 January 2018 (£1,010,000 on 1 January 2017) as a result of long-term assets being recognised for the prepaid commissions which will be amortised across the life of the respective contracts.
(iii) Movement in deferred tax
As a result of the adjustments to the net asset position and subsequent retained earnings balance on 1 January 2018, the Group has recognised a net deferred tax liability of £243,000 (1 January 2017: £93,000). This amount has been calculated based on the net equity adjustment multiplied by the relevant tax rate prevailing in the jurisdictions of those Group entities for which IFRS 15 has impacted.
For the six months ended 30 June 2017 and 30 June 2018, the Group has recognised a movement through deferred tax creating an additional tax expense of £10,000 and £23,000 respectively. This is due to the adoption of IFRS 15 bringing about an increase in profit before tax across both periods (year ending 31 December 2017 additional tax expense of £150,000).
IFRS 16
The Group has early adopted IFRS 16 'Leasing' from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the previous period financial statements. In accordance with the transition provisions in IFRS 16, the Group has adopted the new rules retrospectively and has restated comparatives for the 2017 financial year.
The income statement impact on each of the Group's operating segments for the six months ended 30 June 2017 and the year ended 31 December 2017 is summarised below:
Six months ending 30 June 2017
IFRS 16 adjustments
Ref
As
originally presented*
30 Jun 17
£000
Aptitude Software
£000
Microgen Financial Systems
£000
Group
£000
Unaudited IFRS 16
30 Jun Restated*
£000
Operating costs
(i)
(22,758)
13
13
89
(22,643)
Finance costs
(i)
(164)
(30)
(17)
(24)
(235)
Income tax expense
(ii)
(1,308)
4
1
(16)
(1,319)
19. Changes in accounting policies (continued)
Year ending 31 December 2017
IFRS 16 adjustments
Ref
As
originally presented*
31 Dec 17
£000
Aptitude Software
£000
Microgen Financial Systems
£000
Group
£000
Unaudited IFRS 16
31 Dec Restated*
£000
Operating costs
(i)
(51,289)
22
32
176
(51,059)
Finance costs
(i)
(316)
(78)
(32)
(46)
(472)
Income tax expense
(ii)/
(iii)
(991)
16
-
(25)
(1,000)
*The amounts in the tables above and on the previous page include the adjustments from the adoption of IFRS 15
In addition, the following adjustments were made to the amounts recognised in the condensed consolidated balance sheet at the date of initial application (1 January 2018):
Ref
Originally presented*
31 Dec 17
£000
Re-measurements
£000
Unaudited
IFRS 16 carrying amount 1 Jan 18
£000
Property, plant and equipment
(i)
1,825
3,718
5,543
Deferred tax asset
(iii)
1,330
91
1,421
Trade and other payables
(i)
(37,479)
68
(37,411)
Obligations under capital lease
(i)
-
(4,238)
(4,238)
*The amounts in this column include the adjustments from the adoption of IFRS 15
The impact on the Group's retained earnings as at 1 January 2018 and 1 January 2017 is as follows:
2018
2017
Notes
£000
£000
Retained earnings 31 December - after IFRS 15 restatement
(2,351)
(11,154)
Capitalisation of property leases previously recognised as operating leases
(i)
(452)
(526)
Movement in deferred tax
(ii)
91
100
Adjustment to retained earnings from adoption of IFRS 16
(361)
(426)
Opening retained earnings 1 January - IFRS 15 and IFRS 16
(2,712)
(11,580)
19. Changes in accounting policies (continued)
(i) Accounting for property leases previously recognised as operating leases
As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for most leases based on the definition of a lease in section 19(c).
As a consequence, the Group recognised right-of-use assets on its property leases totalling £3,718,000 and corresponding capital lease liabilities of £4,238,000 on 1 January 2018 with a net reduction in retained earnings of £452,000 (£526,000 on 1 January 2017) after taking account of a reduction in trade and other payables of £68,000 due to an onerous lease accrual recognised under the previous policy.
Under IFRS 16, the Group has chosen to apply the practical expedient in relation to its assessment of whether leases are onerous by applying IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" immediately before the date of initial application as an alternative to performing an impairment review. Subsequently, the right-of-use asset at the date of initial application was adjusted by the amount of any provision for onerous leases recognised in the statement of financial position immediately before the date of initial application.
The assets are amortised on a straight-line basis over the term of the lease with the liability being measured at amortised cost using the effective interest method. During the six months to 30 June 2017 and 30 June 2018, additional depreciation of £340,000 and £507,000 was charged along with lease liability interest costs totalling £71,000 and £85,000 (year ending 31 December 2017 additional depreciation and lease interest of £820,000 and £156,000 respectively). These amounts are net of capital lease repayments which, under IAS 17 were charged to the income statement on a straight-line basis in line with their classification as operating leases. Instead, under IFRS 16, these amounts should have been accounted for as a reduction against the lease liability. Subsequently, operating lease costs amounting to £455,000 and £666,000 respectively were credited from the Group's income statement (year ending 31 December 2017 £1,050,000 of operating lease costs credited).
(ii) Movement in deferred tax
The recognition of right-of-use assets and corresponding lease liabilities under IFRS 16 for the Group's various property leases gives rise to deferred tax balances through temporary timing differences. On 1 January 2018, the Group has recognised a deferred tax asset of £91,000 (deferred tax asset of £100,000 on 1 January 2017).
For the six months ended 30 June 2017 and 30 June 2018, the Group recognised a movement through deferred tax which created an additional tax expense of £11,000 and £15,000 respectively. This resulted from the increase in profit before tax across both periods caused by the adoption of IFRS 16 (year ending 31 December 2017 additional tax expense of £9,000).
The values in relation to deferred tax as at the balance sheet date have been calculated based on the latest guidance however this may be subject to change as a result of continued consultation issued by the relevant tax authorities.
19. Changes in accounting policies (continued)
19(c) Accounting policies applied from 1 January 2018
Software licences and maintenance
Software licences (replaces 'Software licences' on page 74 of the 2017 annual report)
The Group licences its software on an Annual Licence Fee, Initial Licence Fee or Perpetual Licence Fee basis
The Group assesses whether ongoing contractual obligations represent a performance obligation that is distinct from the licence. If not distinct the combined performance obligation is recognised over time. If the licence is distinct it is recognised separately from the other performance obligations at the time of the delivery of the licenced software.
In assessing whether a licence is distinct the Group considers the continuing requirement to:-
- optimise functionality;
- optimise performance; and
- provide enhancements to ensure user regulatory compliance
If there is a combined performance obligation then the Group will determine for each contract the period over which significant modification and optimisation of software is required, or whether the requirement is on-going during the expected duration of the contract.
In determining the most appropriate method of recognising revenue over time, the Group has concluded that the combined performance obligation will be recognised in line with development activity related to the relevant product over the period in which the enhancements are required by the particular user. If, however, there is a continuing requirement to provide enhancements to ensure user regulatory compliance the annual licence fee received by clients will be recognised on a straight line basis in the period covered by the invoice.
Commissions (a new accounting policy)
Software sales commission costs meets the definition under IFRS 15 of incremental costs of obtaining a contract. As a result, an asset is recognised at inception of the contract for the total value of commissions payable which will typically be amortised across the contract life of each client.
19. Changes in accounting policies (continued)
Leasing (replaces the accounting policy 'Leasing' provided at page 75 of the 2017 annual report)
At inception of a contract, the Group assesses whether a contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:
· The contract involved the use of an identified asset - this may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified
· The Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
· The Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purposes the asset is used. In rare cases where all the decisions about how and for what purpose the asset is used are predetermined, the Group has the right to direct the use of the asset if either:
- The Group has the right to operate the asset; or
- The Group designed the asset in a way that predetermines how and for what purpose it will be used.
The Group has applied this approach on a fully retrospective basis to contracts entered into, or changed, on or after 1 January 2018.
On lease commencement date, the Group recognises a right-of-use asset and a lease liability. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability comprise:
- Fixed payments, including in-substance fixed payments;
- Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; and
- Lease payments in an option renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.
19. Changes in accounting policies (continued)
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or if the Group changes its assessment of whether it will exercise an extension or termination option.
Where the Group leases properties with no defined lease term, management have made an estimate of the remaining lease term on commencement date based on their view of the business needs. The lease liability is then remeasured if circumstances arise which change management's perception of the remaining lease term and subsequent future lease payments.
If the contract includes options to break or terminate the lease which are at the right of the lessor, the Group measures the lease term based on the expectation that these will lapse unless it has been made aware at the time of adoption. If subsequently the lessor decides to exercise any of these options, the lease liability is then remeasured due to the change in future lease payments.
When the lease liability is remeasured in the above circumstances, a corresponding adjustment is made to the carrying value of the right-of-use asset, or is recorded in the profit or loss if the carrying value of the right-of-use asset has been reduced to zero.
The Group presents right-of-use assets within "property, plant and equipment" and lease liabilities in "capital lease obligations".
Short term lease and leases of low-value assets
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term lease of machinery that have a lease term of 12 months or less and leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
The impact of this policy change is detailed within note 19(b).
Trade receivables (replaces the accounting policy 'Trade receivables' provided at page 78 of the 2017 annual report)
Trade receivables are recognised initially at fair value and to the extent that it is deemed necessary are subsequently measured at amortised cost using the effective interest method, less provision for impairment. The Group assesses impairment on a forward-looking basis using the expected credit loss method and has applied the simplified approach which permits the use of the lifetime expected loss provision for all trade receivables.
20. Post balance sheet events
On 2 July 2018, the Group agreed to the sale of Microgen Banking Systems Limited which held the Groups Payments business for consideration of £6.9 million. For the six month period to 30 June 2018 the business generated £0.76 million of revenue and £0.56 million of operating profit and had net assets at disposal of £1.0 million. Full details of the transaction will be provided within the 2018 Annual Report.
21. Statement of directors' responsibilities
The directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
- an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
- material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.
The directors of Microgen plc are listed in the Microgen plc Annual Report for 31 December 2017. A list of current directors is maintained on the Microgen plc website: www.microgen.com
Copies of this statement are being posted to shareholders and will also be available on the investor relations page of our website (www.microgen.com). Further copies are available from the Company Secretary at Old Change House, 128 Queen Victoria Street, London, England, EC4V 4BJ.
By order of the Board
P Wood
20 July 2018
Group Finance Director
Independent review report to Microgen plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Microgen plc's condensed consolidated interim financial statements (the "interim financial statements") in the Interim Results of Microgen plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
· the condensed consolidated interim balance sheet as at 30 June 2018;
· the condensed consolidated interim statement of comprehensive income for the period then ended;
· the condensed consolidated interim statement of cash flow for the period then ended;
· the condensed consolidated interim statement of changes in equity for the period then ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Interim Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the Interim Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Reading
20 July 2018
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDIR GMGZNNGKGRZM
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