Final Results
26/04/2022 09:54
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RNS Number : 3608J Instem plc 26 April 2022
26 April 2022
Instem plc
("Instem" or "the Company")
Unaudited Results for the Year Ended 31 December 2021 & Investor Presentation
Instem plc (AIM: INS), a leading provider of IT solutions to the global life sciences market,
announces its unaudited results for the year ended 31 December 2021 (the
"Period").
Financial Highlights:
· Revenues increased 63% to £46.0m (2020: £28.2m)
o Recurring revenue (annual support and SaaS) increased 43% to £24.1m
(2020: £16.9m) with SaaS revenues increasing 21% to £9.7m (2020: £8m)
o Organic revenue growth of 7% to £30.1m (2020: £28.2m)
o Organic constant currency revenue growth of 12-%
o SaaS Annual Recurring Revenue ("ARR") of £11.5m at 1 January 2022
· Adjusted EBITDA* of £8.3m (2020: £5.9m)
· Reported profit before tax of £3.0m (2020: profit of
£2.5m)
· Adjusted profit before tax** of £5.0m (2020: £4.0m)
· Fully diluted earnings per share of 7.4p (2020: 11.6p
earnings per share)
· Adjusted fully diluted earnings per share** of 16.3p (2020:
19.1p)
· Gross cash balance at 31 December 2021 of £15.0m (2020:
£26.7m, reflecting the equity raise in July 2020 to fund the 2021
acquisitions).
For an explanation of the alternative performance measures in the report,
please refer to page 12
*Earnings before interest, tax, depreciation, amortisation and non-recurring
items.
**After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance
income/(costs), non-recurring items and amortisation of intangibles on
acquisitions.
Operational Highlights
· Strong organic growth with little impact from COVID-19
· New business revenue came from both new and existing clients
· Further expansion of footprint in the Asia-Pacific region
· Continued transition to the SaaS model further increased
recurring revenue and earnings visibility
· Transformed the scale and reach of the business through
acquisitions of:
o The Edge Software Consultancy ("The Edge")
o d-Wise Technologies Inc ("d-wise")
o PDS Pathology Data Systems Ltd ("PDS")
Post Period-End Highlights
· New banking facility finalised with HSBC of up to £20m, £10m of
which is committed
· Earn outs met in full for d-wise and The Edge (PDS has no earn
out provision)
· No known exposure to Russia or Ukraine
Phil Reason, CEO, commented: "The performance during the year highlighted our
resilience - especially given the COVID-19 backdrop, and I would like to thank
all of our staff for their continued efforts and hard work. Our proven model
continues to generate strong cash flows while the combination of increasing
demand for regulatory-backed solutions and a growing demand for artificial
intelligence and in silico solutions in the drug R&D process underpins our
confidence in further leveraging our software and service portfolio. As such,
we now have the platform in place to capitalise on the various opportunities
ahead of us and we look forward to reporting further progress as we continue
to execute our growth strategy.
In common with other businesses, we have seen wage inflation in recent months
and, accordingly, we are moderating our profit expectations for the current
year ahead of price rises on contract renewals flowing through positively to
revenue. Importantly, we already have good visibility for the current year
with growing recurring SaaS and Annual Support revenues and a strong pipeline.
The recent acquisitions of The Edge, d-wise and PDS highlight our ability to
add scale and leverage existing customer relationships with a view to further
enhancing earnings, while providing a strong platform for continued growth.
We look forward to advancing further acquisition opportunities after
consolidating the 2021 additions."
Investor Presentation: 16:00 today
Management will be providing a presentation and hosting an Investor Q&A
session on the results and future prospects today at 16:00, through the
digital platform Investor Meet Company. Investors can sign up for free and add
to attend the presentation via the following link
https://www.investormeetcompany.com/instem-
(https://www.investormeetcompany.com/instem-plc/register-investor)
plc/register-investor
(https://www.investormeetcompany.com/instem-plc/register-investor) . Questions
can be submitted pre event and at any time during the live presentation via
the Investor Meet Company Platform.
For further information, please contact:
Instem plc Via Walbrook
Phil Reason, CEO
Nigel Goldsmith, CFO
Singer Capital Markets (Nominated Adviser & Joint Broker) +44 (0) 20 7496 3000
Peter Steel
Alex Bond Rachel Hayes
Joint Broker (Stifel Nicolaus Europe Limited) +44 (0) 20 7710 7600
Ben Maddison
Alex Price
Walbrook Financial PR +44 (0) 20 7933 8780
Tom Cooper instem@walbrookpr.com (mailto:instem@walbrookpr.com)
Nick Rome
Nicholas Johnson
About Instem
Instem is a leading provider of IT solutions & services to the life sciences market delivering compelling solutions
for Study Management and Data Collection; Regulatory Solutions for Submissions
and Compliance; and Informatics-based Insight Generation.
Instem solutions are in use by over 700 customers worldwide, including all the
largest 25 pharmaceutical companies, enabling clients to bring life enhancing
products to market faster. Instem's portfolio of software solutions increases
client productivity by automating study-related processes while offering the
unique ability to generate new knowledge through the extraction and
harmonisation of actionable scientific information.
Instem products and services address aspects of the entire drug development
value chain, from discovery through to market launch. Management estimate that
over 50% of all drugs on the market have been through some part of Instem's
platform at some stage of their development.
To learn more about Instem solutions and its mission, please visit
www.instem.com (http://www.instem.com/)
Chairman's Statement
The achievements of the Company in the year have been outstanding. Not only
has our operational performance been exceptional but the business has also
accomplished a fundamental strategic shift in its scale and reach as a result
of the completion of three important acquisitions. As a consequence, our
standing within the wider industry has been significantly enhanced.
In July 2020 we raised funds to acquire businesses that we believed would be
transformational to the company by extending our 'footprint' in the life
sciences R&D space, providing a stronger platform for long term growth. I
believe that we can say that this has been achieved. The acquisitions of
d-wise and The Edge have significantly extended our product and service
portfolio, whilst the acquisition of PDS ensures that our position in the
preclinical space is unrivalled.
Whilst the integration of the acquired businesses is ongoing, we have already
seen the benefits of their skillsets and teams operating within the enlarged
Group, providing a significant contribution to our overall financial
performance in the year.
Operations
The Company's strong infrastructure and ability to operate remotely provided
essential resilience in our business operations as the pandemic continued. We
are delighted with and thankful for the team's efforts throughout this
challenging period.
We have made notable progress on a number of key metrics during the Period. In
particular:
· Continued growth in SaaS-based revenues (increased 21% to £9.7m)
both through new business wins and via the ongoing conversion of existing
clients
· Total Group revenues increased 63% - including the partial year
impact of the acquisitions completed during the period
· Adjusted EBITDA increased 39%
· Net cash generated from operations of £10.3m
Corporate Enhancement
We were delighted to welcome Mr Riaz Bandali to the Board in December 2021.
Riaz has spent his entire career in the healthcare and life sciences
industries in a variety of strategic, commercial and operational roles at
senior level, also including exposure to fundraising and M&A activity and,
as such, brings a wealth of relevant experience and contacts in the North
American and wider life sciences industry. We are also continuing with our
efforts to identify a further suitable Independent NED candidate and look
forward to updating shareholders in due course.
We were also delighted to appoint Stifel as Joint broker alongside/with
Singer Capital Markets to enhance our presence, both in the North American and
European investor markets.
Looking Forward
In the short term, we are confident that we can continue to execute our growth
plans for the Group. That said, labour cost inflation, in particular, has
significantly increased in recent times. As a result, although anticipating
material improvement over 2021, we are prudently moderating our profit
expectations for the current year, whilst planning to regain ground in the
following year, as justifiable price increases flow through to revenue.
The three acquisitions, completed in the year, have extended our reach from
discovery to clinical trials across the drug discovery and development
lifecycle. As a result, the Company is now closer to becoming a one-stop shop
for life sciences companies looking for long term partnerships to assist them
over the drug discovery and development landscape.
Whilst our near-term focus remains on completing the successful integration of
the recently acquired businesses, the Board believes that this new platform
will create substantial opportunities for further development of the business.
These include:
- Organic revenue growth from additional market penetration,
cross-selling and the introduction of new products and services
- Margin improvement through conversion to SaaS deployment and
leveraging our global infrastructure
- Accretive M&A and strategic partnerships in existing
markets, as well as entry into related adjacent areas.
In summary, we believe that the momentum and platform we now have in place
ensures that the Company is well positioned for continued success over the
longer term.
David Gare
Non-Executive Chairman 26 April 2022
Chief Executive's Report
Strategic Development
During 2021, the Group materially advanced its ability to pursue its strategic
thesis of providing data driven, "in silico" alternatives to traditional
client experimental processes with the aim of radically reducing the cost and
time of life sciences R&D. The strategy is based on leveraging trusted
client and regulatory relationships and our intimate understanding of complex
scientific data, established by providing a broad portfolio of market leading
IT solutions that optimize today's life sciences R&D processes, from early
discovery to late-stage clinical trials. The acquisition of The Edge has
strengthened our position in discovery and d-wise adds a well-respected market
leader in the analysis and de-identification of clinical trial data.
Instem's already strong market presence in non-clinical development was
enhanced by the acquisition of long-term competitor PDS and we are now well
positioned to provide innovative solutions across the entire R&D
continuum.
Organic growth remained strong, with retention of recurring SaaS and Annual
Support revenue once again ahead of our 98% key performance indicator and new
business win rates confirming our market leadership across our broad
portfolio. Although the increasing rate of SaaS deployment, for existing and
new clients, moderated short term revenue growth, due to the switch from
perpetual license revenue recognition to longer term subscription rentals,
overall organic revenue growth remained strong.
Market Review
The market backdrop continues to be favourable for the Group given global
population growth and life expectancy underpinning increased demand for
successful innovation in life sciences. Increasing amounts of money are being
invested in the biotech industry with the pharmaceuticals sector investing
heavily in drug development, underpinning a strong pipeline for Instem. The
market dynamics were highlighted further by the ongoing COVID-19 pandemic,
which presented a number of new opportunities as R&D increased with all
the major companies focusing on developing vaccines or therapies.
In the pharmaceutical industry, which represents the largest proportion of
Instem's revenue, we refer again to the Pharma R&D Annual Review, the 2022
version of which was released by Pharma Intelligence in March this year. This
report shows that the industry grew strongly in the last 12 months with an
8.2% increase (2020: 4.8%) in the total number of drugs in the regulatory
stages of global R&D, continuing a multi-year growth trend that shows no
sign of abating. Most relevant to Instem are the increase in the number of
drugs at the preclinical (or non-clinical) phase of drug development of 11.0%
(2020: 6.0%) and clinical phases 1-3 where there was an 8.3% increase (2020:
3.6%), as these areas account for much of our business.
The constant development of the drug discovery pipeline continues to drive
demand for Instem's solutions - which enable companies to provide faster and
cheaper routes to market for their life changing products. Importantly, the
regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND")
continues to underpin longer term opportunity and visibility in the
non-clinical segment. Similar regulatory standards help with demand for our
clinical trial analysis solutions and mandatory provision of de-identified
clinical trial data for European and Canadian regulatory authority approved
drugs enhances demand for our clinical trial transparency software and
services.
Business Performance
Study Management
Performance here was very pleasing, with revenue growth compared with the
prior period of 35%, with 17% organic growth and 17% from acquisitions,
including 10 months contribution from The Edge and 4 months from PDS.
The 11% increase in the number of drugs in the non-clinical stage of
development has supported significant growth for the contract research
organizations (CROs) specializing in this area and they in turn have been
purchasing additional users for our products, additional product modules that
they had not yet licensed and services to support their successful deployment
and use of our solutions.
The majority of the revenue associated with orders in excess of £2.7m,
announced for one of our largest
CRO clients on 15 December 2020 and in our 14 January 2021 Trading Update, was
recognized in 2021 and
we continue to collaborate extensively with this customer as they look for
competitive advantage through
technology investment. Most of this additional revenue was study management
related but also included
new SEND related capabilities, much of which will benefit the wider SEND
community.
The acquisition of The Edge has broadened Instem's reach into the Discovery
Study Management market, providing scope for increased cross-selling
particularly in the Drug Metabolism & Pharmacokinetics (DMPK) field. The
Edge extends the Company's reach within existing and new clients and enhances
our technology
offering. Provided predominantly on a subscription basis, The Edge has
helped to expand our recurring revenue.
In Silico Solutions
Following a slow H1 2021, as a result of the pandemic, demand picked up during
H2. This is an area where we have historically generated significant market
awareness and sales pipeline at scientific conferences, as both Instem staff
and reference clients presented a new, "disruptive" approach to the
established method of assessing the potential safety issues of modulating a
biological target thought to offer therapeutic benefit. We were eagerly
awaiting the post COVID-19 return to in person conferences, which were further
delayed by the Delta and Omicron variants. Post period end, in late March
2022 we attended the largest event of this type, the "Society of Toxicology"
annual meeting, and were extremely encouraged by the strong interest in our In
Silico solutions.
In November 2021 the Company announced the release of the latest edition of
its Leadscope Model Applier computational toxicology software solution. This
release included a comprehensive package of new and updated models to meet the
growing market demand for in silico solutions, which are often heavily
encouraged and supported by the global regulatory authorities.
Regulatory Solutions
Every drug company is required to submit non-clinical data in the SEND format
to the FDA (Food and Drug
Administration) as part of the processes for testing and getting approval for a new drug. The combination of the
industry's focus on addressing a continuing backlog of SEND conversion work,
in addition to the standard being extended to new study types, provides a
solid platform for continued growth.
Instem's technology creates, manages
and visualizes SEND datasets, while the Group
also provides technology- enabled outsourced services, enabling customers to
make FDA submissions with confidence.
The industry is increasingly looking to unlock silos of information and
importantly, customers are starting to contemplate
Instem's SEND solutions as a consistent approach to leveraging their valuable historic studies for more efficient
and effective research. This is providing a growing source of revenue for the Group, highlighted through a £0.7m
top-30 pharmaceutical company contract for conversion of historical studies to
the SEND format, and subsequently the data warehouse and exploration
technology platform to house this data, both won during the Period.
The acquisition of competitor PDS allows for greater industry standardization
on Instem's SEND technology platform and has brought a further 17 US-based
SEND consultants to an outsourced services team of 72 people, 38 of whom are
based in India. Instem's expertise, capacity, and business in this area is
unrivalled.
Clinical Trial Acceleration
The acquisition of d-wise on 1 April 2021 led to the creation of a fourth
business unit, Clinical Trial Acceleration, which pleasingly met its
EBITDA-based earn out target for the financial year ending 31 December 2021.
Solid progress was made in all areas of the business, with material
contribution during the period from two statistical computing environment
(SCE) solution lines of business:
· the productised integration of leading technology tools, hosted
by Instem for small to mid-sized pharmaceutical companies and CROs
· large custom projects for bigger clients
Focus and investment increased during the year on Aspire, a next generation
clinical analytics framework of flexible components that can be leveraged in
both the productised or custom approaches to building and deploying SCE
solutions. Aspire is expected to significantly speed up the time to deployment
of a new SCE solution, to provide recurring SaaS revenue and, ultimately, to
result in higher project margins.
With some Covid-related relaxation by the European and Canadian regulatory
authorities of the requirement for submission of anonymised clinical trial
data for each approved new drug, we experienced lower than expected demand for
our clinical trial transparency products and outsourced services, however this
remains a promising regulatory mandated growth opportunity.
Financial Review
Key Performance Indicators (KPIs)
The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available
for the working capital requirements of the Group. Primary KPIs at the
year-end were:
2021 2020
£000 £000 % Change
Total revenue 46,017 28,217 63%
Organic revenue(1) * 30,052 28,217 7%
Recurring revenue(1) ** 24,082 16,941 42%
Annual Recurring Revenue(1) 28,741 - -
Recurring revenue as a percentage of total revenue 52% 60% -800bps
Adjusted EBITDA(1) *** 8,250 5,919 39%
Adjusted EBITDA Margin % 17.9% 21.0% -310bps
Cash and cash equivalents 15,021 26,724 (44%)
Organic customer retention rate for recurring SaaS and Annual Support revenue 98% - -
(1) For an explanation of the alternative performance measures in the report,
please refer to page 12
* Excluding revenue from the new acquired businesses
** Recurring revenue includes Annual support fees and SaaS subscription fees.
*** Earnings before interest, tax, depreciation, amortisation and
non-recurring items.
In addition, non-financial KPIs are periodically reviewed and assessed,
including customer and staff retention rates.
Instem's revenue model consists of perpetual licence income with annual
support and maintenance contracts, professional fees, technology enabled
outsourced services fees, SaaS subscriptions and consultancy services.
Total revenues increased by 63% to £46.0m (2020: £28.2m) including The Edge,
d-wise and PDS revenue, which were acquired in March, April and September
2021. Total organic revenue increased by 7% to £30.1m (2020: £28.2m).
Recurring revenue, comprising Support & Maintenance contracts and SaaS
subscriptions, increased during the year by 42% to £24.1m (2020: £16.9m).
Recurring revenue as a percentage of total revenue was 52% (2020: 60%). In
absolute terms, recurring revenue increased over the year by £7.2m but its
percentage of the total decreased due primarily to the addition of d-wise
consulting revenue, which is shown as non-recurring.
Revenue from technology enabled outsourced services remained stable at £6.4m
(2020: £6.2m). Operating expenses increased by 69% in the period reflecting
the ongoing investment in operational teams and mainly the inclusion of The
Edge, d-wise and PDS costs. Like-for-like operating costs increased by 7%.
Earnings before interest, tax, depreciation, amortisation and non-recurring
items (Adjusted EBITDA) increased by 41% to £8.3m (2020: £5.9m). For this
measure of earnings, the margin as a percentage of revenue decreased in the
period to 17.9% from 21% in 2020, entirely due to the impact of the lower than
Instem average margins of d-wise and PDS.
Non-recurring costs in the period were £1.29m (2020: £0.06m), consisting of
£0.1m for legal expenses associated with historical contract disputes,
£0.17m for share based payments and £1.02m of acquisition costs.
Non-recurring income of £0.8m ($1.1m) relates to US federal government
COVID-19 support loans, which were forgiven during 2021, refer to note 3 for
non-recurring items.
The reported profit before tax for the year was £3.0m (2020: profit of
£2.5m). Adjusted profit before tax (i.e. adjusting for the effect of foreign
currency exchange on the revaluation of inter-company balances included in
finance income/(costs), non-recurring items and amortisation of
intangibles on acquisitions) was £5.0m (2020: £4.0m).
The total income tax charge in the year of £1.3m (2020: £0.3m) is an
effective tax rate of 43.8% (2020: 10.8%). The increase in the tax charge is
mainly due to higher foreign tax payables and the impact on deferred tax of
the UK corporation tax rate increase to 25% from April 2023. In the UK, the
Group continues to receive additional tax relief on its research and
development expenditure, which is expected to continue into future years.
The Group continues to maintain its investment in its product portfolio.
Research and development costs incurred during the year were £4.9m (2020:
£3.4m), of which £2.2m (2020: £1.2m) was capitalised.
The Group operates internationally and is exposed to foreign currency risk on
transactions denominated in a currency other than the functional currency and
on the translation of the statement of financial position and statement of
comprehensive income of foreign operations into sterling. The currency that
gave rise to this risk in 2021 was primarily from realised US dollars
transactions. In 2021, the organic revenue growth excluding the foreign
exchange exposure was 12-%. The foreign exchange loss recorded during 2021 was
£0.04m (2020: £0.5m) which is composed of realised and unrealised
gains/losses.
Basic and diluted earnings per share calculated on an adjusted basis were
17.2p and 16.3p respectively (2020: 20.4p basic and 19.1p diluted). The
reported basic and diluted earnings per share were 7.8p and 7.4p respectively
(2020: 12.3p basic and 11.6p diluted).
On 1 March 2021, Instem announced the acquisition of The Edge, a study
management software provider based in the UK. The Edge is focused on improving
the efficiency of early-stage drug R&D, improving productivity and
ensuring high-quality data capture. The consideration payable is up to £8.5m,
payable as £6.0m initially, satisfied by £4.0m in cash from existing
reserves and £2.0m via the issuance of 391,920 new ordinary shares in Instem
plc, £0.5m of deferred consideration and up to a further £2.0m payable
contingent on The Edge's future trading performance, both amounts payable in
cash. In addition, the amount of £1.5m was paid as a net cash adjustment
after deducting the estimated debt at the point of the acquisition.
On 1 April 2021, Instem acquired US-based clinical trial technology &
consulting leader d-wise Technologies, Inc. (d-wise). D-wise adds another
market leading position to the Group in an attractive adjacent area of
clinical trial analysis and submission, with good future visibility through
recurring revenue streams and already contracted, high value consultancy
projects. The combined strength of Instem & d-wise positions the enlarged
Group as the foremost authority and driving force in generating, analysing and
leveraging data from Discovery through late-stage Clinical Trials. The total
consideration is up to $31.5m comprising $20m (c. £14,5m) on completion,
$8.5m (c. £6,2m) of deferred consideration and up to a further $3m (c.
£2,2m) which is payable contingent upon the future financial performance of
d-wise. The initial consideration on completion was satisfied by $13m (c.
£9,4m) in cash and $7m (c. £9,8m) via the issuance of 868,203 new ordinary
shares of 10p each in Instem plc. The initial cash payment was funded from the
Group's existing financial resources.
Finally on 1 September 2021, Instem announced the acquisition of PDS Pathology
Data Systems Ltd ("PDS"), a direct competitor in the life sciences space with
headquarters in Switzerland and offices in the United States and Japan. The
Initial Consideration was satisfied by CHF 4.7m in cash (c. £3.7m) and CHF
3.5m (c. £2.8m) via the issuance of 359,157 new ordinary shares of 10p each
in Instem plc. The cash payment, loan repayments and other net liabilities
payments are being funded from the Group's existing financial resources. PDS
acquisition enables Instem to concentrate investment on a single line of SEND
and preclinical study management products, removing unnecessary duplication in
the market. The combination of technologies and highly experienced teams will
enable the Group to enhance the development and delivery of existing and new
solutions that provide higher value to its clients.
The financial obligations associated with these acquisitions during 2022 and
2023 are deferred and contingent consideration payments of £6.5m and £5.3m
respectively, in a combination of cash and shares. The contingent
consideration reflects management's estimate that the entities will achieve
the profitability target. The amount of £1.1m payable to d-wise in relation
to its contingent consideration could be settled in a combination of cash and
shares of Instem plc at the discretion of the Group. However, the amount of
£0.8m which is part of the d-wise deferred consideration will be payable in
shares.
The period saw again strong net cash generated from operations of £10.3m
(2020: £7.4m), largely due to cash inflows from the newly acquired
businesses, key contracts, outsourced services and effective working capital
management. The Group's cash resources were used to accelerate the Group's
acquisition strategy with the acquisition of the Edge, d-wise and PDS. The net
cash payment for purchasing those subsidiaries was £17.2m (net of cash
acquired). The proceeds of £0.8m ($1.1m) which were part of the US federal
government support for businesses during the COVID-19 pandemic have been fully
forgiven during 2021. As a result of the above and the positive organic cash
generation achieved in the period, the cash balance decreased from £26.7m to
£15.0m.
The latest triennial actuarial valuation of the Group's legacy defined benefit
pension scheme as at 5 April 2020, was completed in July 2021. As part of the
process, the Group has agreed a revised Schedule of Contributions with the
Trustees of the Scheme, which are intended to clear the Scheme deficit by 30
September 2026.
At 31 December 2021, the IAS19 accounting pension deficit decreased by £1.9m
to £2.0m (2020: £3.9m). The agreed Group cash contributions currently
approximate to £0.6m per annum, payable through to September 2026. The
deficit at the 2021 year-end of £2.0m (2020: £3.9m) is represented by the
fair value of assets of £14.0m (2020: £12.5m) and the present value of
funded obligations of £16.0m (2020: £16.4m), after applying a discount rate
of 1.90% (2020: 1.40%).
Alternative performance measures
This Annual Report and Accounts contains certain financial alternative
performance measures ("APMs") that are not defined or recognised under IFRS
but are presented to provide readers with additional financial information
that is evaluated by management and investors in assessing the performance of
the Group. This additional information presented is not uniformly defined by
all companies and may not be comparable with similarly titled measures and
disclosures by other companies.
The table below provides the data for certain performance measures mentioned
above:
2021 2020
£000 £000
Annual support fees 14,378 8,917
SaaS subscription and support fees 9,704 8,024
Recurring revenue 24,082 16,941
Licence fees 4,597 3,477
Professional services 3,651 1,603
Technology enabled outsourced services 6,378 6,196
Consultancy services 7,309 -
Total revenue 46,017 28,217
Recurring revenue is the revenue that annually repeats under contractual
arrangement. It highlights how much of the Group's total revenue is secured
and anticipated to repeat in future periods, providing a measure of the
financial strength of the business.
2021 2020
£000 £000
Total revenue 46,017 28,217
Revenue from the acquisitions (15,965) -
Organic revenue 30,052 28,217
Organic revenue is the revenue excluding the impact of acquisition which
highlights the Group's income generated from the primary operations.
2021 2020
£000 £000
Recurring Revenue 24,082 -
Annual recurring revenue adjustment 4,659 -
Annual Recurring Revenue 28,741 -
Annual recurring revenue is the revenue that is annually repeats under
contractual arrangement considering also the acquisitions were part of the
group for 12 months. The revenue has also been adjusted for new and lost
contracts.
2021 2020
£000 £000
EBITDA 7,769 5,313
Nonrecurring cost 1,286 606
Nonrecurring income (805) -
Adjusted EBITDA 8,250 5,919
Adjusted EBITDA is EBITDA plus non-recurring items (as set out in note 3). The
same adjustments are also made in determining the adjusted EBITDA margin.
Items are only classified as exceptional due to their nature or size, and the
Board considers that this metric provides the best measure of assessing
underlying trading performance.
2021 2020
£000 £000
Profit before tax 2,984 2,549
Amortisation of intangibles arising on acquisition 1,563 664
Nonrecurring cost 1,286 606
Nonrecurring income (805) -
Intercompany foreign exchange (gain)/loss (18) 208
Adjusted profit before tax 5,010 4,027
Adjusted profit before tax is 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.
The same adjustments are also made in determining adjusted earnings per share
("EPS"). The Board considers this adjusted measure of operating profit
provides the best metric of assessing underlying performance.
2021 2020
£000 £000
Weighted average number of shares (000's) 22,719 19,652
Adjusted diluted earnings per share 16.3p 19.1p
Cash at bank 24,019 35,722
Bank overdraft (8,998) (8,998)
Cash balance 15,021 26,724
Post Period-End
An historical contractual licence dispute, which does not affect the ongoing
operations of the Group, was heard by a German court on 17 March 2022 and the
official outcome is awaited. The Group has been defending the action and
strongly believes that the claim should be dismissed.
Notwithstanding this, the cost provision of £0.25m made in 2017 has been
maintained in the 2021 financial statements. As the potential financial
outcome cannot yet be determined with any certainty the Board has concluded
that the £0.25m provision was appropriate at 31 December 2021. To date all
legal expenses have been expensed.
On 8 April 2022, the Group signed a new financing arrangement which consists
of a committed facility of £10.0m with HSBC UK Bank plc to support the
Group's working capital needs and its acquisition strategy, which can be
extended up to £20.0m if needed, subject to further bank approval. The
financial covenants have been considered in the forecast to ensure compliance.
Outlook
The performance during the year highlighted our resilience - especially given
the COVID-19 backdrop, and I would like to thank all of our staff for their
continued efforts and hard work. Our proven model continues to generate strong
cash flows while the combination of increasing demand for regulatory-backed
solutions and a growing demand for artificial intelligence and in silico
solutions in the drug R&D process underpins our confidence in further
leveraging our software and service portfolio. As such, we now have the
platform in place to capitalise on the various opportunities ahead of us and
we look forward to reporting further progress as we continue to execute our
growth strategy.
In common with other businesses, we have seen wage inflation in recent months
and, accordingly, we are moderating our profit expectations for the current
year ahead of price rises on contract renewals flowing through positively to
revenue. Importantly, we already have good visibility for the current year
with growing recurring SaaS and Annual Support revenues and a strong pipeline.
The recent acquisitions of The Edge, d-wise and PDS highlight our ability to
add scale and leverage existing customer relationships with a view to further
enhancing earnings, while providing a strong platform for continued growth.
We look forward to advancing further acquisition opportunities after
consolidating the 2021 additions.
Phil Reason Chief Executive 26 April 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
Year ended Year ended
Note
31 December 2021 31 December 2020
£000 £000
REVENUE 2 46,017 28,217
Employee benefits expense (26,918) (16,508)
Other expenses (10,491) (5,790)
Net impairment (losses)/gains on financial assets (358) -
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND
NON-RECURRING COSTS (ADJUSTED EBITDA)
8,250 5,919
Depreciation (312) (138)
Amortisation of intangibles arising on acquisitions (1,563) (664)
Amortisation of internally generated intangibles (851) (736)
Depreciation of right of use assets 7 (945) (572)
OPERATING PROFIT BEFORE NON-RECURRING COSTS 4,579 3,809
Non-recurring costs 3 (1,286) (606)
Non-recurring income 3 805 -
OPERATING PROFIT AFTER NON-RECURRING COSTS 4,098 3,203
Finance income 4 30 38
Finance costs 5 (1,144) (692)
PROFIT BEFORE TAXATION 2,984 2,549
Taxation 6 (1,306) (275)
PROFIT FOR THE YEAR 1,678 2,274
OTHER COMPREHENSIVE INCOME/ (EXPENSE)
Items that will not be reclassified to profit and loss account:
Actuarial gain/(loss) on net defined benefit liability 1,375 (2,537)
Deferred tax on actuarial loss/ gain (140) 518
Deferred tax on share options - 322
1,235 (1,697)
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations (294) 10
_______ _______
OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR 941 (1,687)
_______ _______
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,619 587
PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY 1,678 2,274
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY
2,619 587
Earnings per share
Basic 8 7.8 12.3
Diluted 8 7.4 11.6
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2021
2021 2020
£000 £000 £000 £000
ASSETS
NON-CURRENT ASSETS
Intangible assets 58,311 18,023
Property, plant and equipment 592 238
Right of use assets 2,077 1,742
Finance lease receivables 85 128
TOTAL NON-CURRENT ASSETS 61,065 20,131
CURRENT ASSETS
Inventories 64 50
Trade and other receivables 14,852 6,093
Finance lease receivables 44 41
Tax receivable 130 724
Cash and cash equivalents 15,021 26,724
TOTAL CURRENT ASSETS 30,111 33,632
TOTAL ASSETS 91,176 53,763
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 5,723 2,958
Deferred income 18,935 9,878
Financial liabilities 6,612 268
Lease liabilities 1,077 608
TOTAL CURRENT LIABILITIES 32,347 13,712
NON-CURRENT LIABILITIES
Financial liabilities 4,728 1,131
Pension obligations 2,014 3,868
Provision for liabilities 291 250
Lease liabilities 1,248 1,476
Deferred tax liabilities 3,247 90
TOTAL NON-CURRENT LIABILITIES 11,528 6,815
TOTAL LIABILITIES 43,875 20,527
EQUITY
Share capital 2,219 2,048
Share premium 28,191 28,172
Merger reserve 12,104 2,432
Share based payment reserve 2,294 930
Translation reserve (202) 92
Retained earnings 2,695 (438)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
47,301 33,236
TOTAL EQUITY AND LIABILITIES 91,176 53,763
CONSOLIDATED STATEMENT OF CASH FLOW
For the year ended 31 December 2021
2021 2020
Note
£000 £000 £000 £000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before taxation 2,984 2,549
Adjustments for:
Depreciation 312 138
Amortisation of intangibles 2,414 1,400
Depreciation of right of use assets 945 572
Share based payment charge 1,061 427
Contributions to defined benefit pension scheme (530) (512)
Government support loan forgiveness (805) -
Finance income 4 (30) (38)
Finance costs 5 1,144 692
Loss on disposal of fixed assets 3 2
CASH FLOWS FROM OPERATIONS BEFORE
MOVEMENTS IN WORKING CAPITAL 7,498 5,230
Movements in working capital:
Increase in inventories (14) (14)
(Increase)/ decrease in trade and other receivables (1,573) 742
Increase in trade, other payables and deferred income 4,432 1,410
NET CASH GENERATED FROM OPERATIONS 10,343 7,368
Finance income 4 6 38
Finance costs (276) (648)
Income taxes (873) 183
NET CASH GENERATED FROM OPERATING ACTIVITIES 9,200 6,941
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalisation of development costs and software (2,238) (1,272)
Purchase of property, plant and equipment (144) (141)
Payment of deferred consideration (277) (277)
Purchase of subsidiary undertakings (net of cash acquired) 9,10,11 (14,840) -
NET CASH USED IN INVESTING ACTIVITIES (17,499) (1,690)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital 22 16,167
Issue costs - (744)
Proceeds from government support loan - 810
Repayment of lease liabilities 8 (963) (621)
Receipts from sublease of asset 8 40 40
Repayment of lease capital - (15)
Repayment of former PDS's shareholder loan 11 (2,387) -
NET CASH GENERATED (USED IN)/ FROM FINANCING ACTIVITIES (3,288) 15,637
NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS (11,587) 20,888
Cash and cash equivalents at start of year 26,724 5,957
Effects of exchange rate changes on the balance of cash held in foreign
currencies
(116) (121)
CASH AND CASH EQUIVALENTS AT END OF YEAR 19 15,021 26,724
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Shares based payment reserve
Share capital Share premium Merger Translation Retained earnings Total
reserve reserve equity
£000 £000 £000 £000 £000 £000 £000
Balance as at 1,662 13,135 2,432 654 82 (1,166) 16,799
1 January 2020
- - - - - 2,274 2,274
Profit for the year
Other comprehensive (expense)/income for the year - - - - 10 (1,697) (1,687)
_______ _______ _______ _______ _______ _______ _______
Total comprehensive income - - - - 10 577 587
Shares issued 386 15,037 - - - - 15,423
Share based payment - - - 427 - - 427
Reserve transfer on lapse of share options
Reserve transfer on exercise of share options - - - (65) - 65 -
- - - (86) - 86 -
Balance as at 2,048 28,172 2,432 930 92 (438) 33,236
31 December 2020
Profit for the year - - - - - 1,678 1,678
Other comprehensive income/(expense) for the year - - - - (294) 1,235 941
Total comprehensive (expense)/income - - - - (294) 2,913 2,619
Shares issued 171 19 9,672 - - - 9,862
Share based payment - - - 1,061 - - 1,061
Deferred tax on share options - - - 528 - - 528
Nil cost option charge - - - (5) - - (5)
Reserve transfer on lapse of share options - - - (25) - 25 -
Reserve transfer on exercise of share options - - - (195) - 195 -
Balance as at 2,219 28,191 12,104 2,294 (202) 2,695 47,301
31 December 2021
NOTES TO THE FINANCIAL STATEMENTS
1 GENERAL INFORMATION
The principal activity and nature of operations of the Group is the provision of world class IT solutions
to the life sciences market. Instem's solutions for data
collection, management and analysis are used by customers worldwide to
meet the needs of life science and healthcare organisations for data-driven
decision making leading to safer, more effective products. Instem plc is a
public limited company, listed on AIM, and incorporated in England and Wales
under the Companies Act 2006 and domiciled
in England and Wales. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire,
ST15 0SD.
BASIS OF PREPARATION
The financial information set out in this preliminary announcement does not
constitute the Group's statutory financial statements for the years ended 31
December 2021 or 2020 as defined in section 435 of the Companies Act 2006 (CA
2006). The financial information for the year ended 31 December 2021 has been
extracted from the Group's unaudited financial statements. Statutory financial
statements for 2020 have been delivered to the Registrar of Companies. The
auditors reported on those accounts; their report was unqualified and did not
contain a statement under either Section 498(2) or Section 498(3) of the
Companies Act 2006.
The Group's accounting reference date is 31 December.
This financial information has been prepared on a going concern basis and
prepared on the historical cost basis. Refer to the Going Concern note for
further details.
FORWARD-LOOKING STATEMENTS
These results were approved by the Board of Directors and authorised for issue
on 26 April 2022. This document contains certain forward-looking statements
which reflect the knowledge and information available to the Company during
the preparation and up to the publication of this document. By their very
nature, these statements depend upon circumstances and relate to events that
may occur in the future thereby involving a degree of uncertainty. Therefore,
nothing in this document should be construed as a profit forecast by the
Company.
STATEMENT OF COMPLIANCE
While the financial information included in this preliminary announcement has
prepared in accordance with UK-adopted international accounting standards in
conformity with the requirements of the Companies Act 2006, this announcement
does not in itself contain sufficient information to comply with UK-adopted
international accounting standards.
ADOPTION OF IFRS
The Group and Company financial statements have been prepared in accordance
with IFRS, IAS and International Financial Reporting Interpretations Committee
(IFRICs) effective as at 31 December 2021. The Group and Company have chosen
not to adopt any amendments or revised standards early.
IFRSs ADOPTED IN THE YEAR
There are a number of standards, amendments to standards, and interpretations
which have been issued by the IASB which are all effective from 1 January
2021. The most significant of these are as follows:
· Interest Rate Benchmark Reform Phase 2 (Amendments to IFRS 9, IAS
39, IFRS 7, IFRS 4 and IFRS 16)
Those standards, amendments to standards, and interpretations have been
adopted and did not have a material impact on the accounting policies of the
Group.
IFRSs ISSUED BUT NOT YET EFFECTIVE
There are a number of standards, amendments to standards, and interpretations
which have been issued by the IASB that are effective in future accounting
periods that the Group has decided not to adopt early. The most significant of
these are as follows, which are all effective for the period beginning 1
January 2022:
· Amendments to IAS 1, 'Presentation of financial statements', on
classification of liabilities
· Amendments to IAS12 'Deferred tax' on deferred tax related to
assets and liabilities arising from a single transaction
· IFRS 3 'Business combination', reference to the Conceptual
Framework and IAS 37, 'Provisions', on onerous contracts
· A number of narrow-scope amendments to IFRS1, IAS 8, IAS16 and
IAS17
· A number of annual improvements on IFRS 1, IFRS 9, IAS 41 and
IFRS 16
These standards are not expected to have a material impact on the entity in
the current or future reporting periods and on foreseeable future
transactions.
BUSINESS COMBINATIONS
Acquisitions of businesses are accounted for using the acquisition
method. The consideration transferred in a business combination is measured
at fair value, which is calculated as the sum of the
acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to
the former owners of the acquiree and the equity interests issued by the Group in exchange for control
of the acquiree. Acquisition related costs are recognised in profit or loss
as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities
assumed are recognised at their fair value, except that deferred tax assets or
liabilities are recognised and measured in accordance with IAS 12 'Income
taxes'.
Consideration may consist of deferred consideration and contingent
consideration. Deferred
consideration is not based on any performance related conditions and is payable on an agreed future
date. Contingent consideration is based on certain performance related conditions and payable on an
agreed future date, if those conditions are met.
Deferred consideration and contingent consideration is measured at their
acquisition-date fair value and are taken into account in the determination of
goodwill. Changes in the fair value of the contingent consideration that
qualify as measurement period adjustments are adjusted retrospectively, with
corresponding adjustments against goodwill. The subsequent accounting for
changes in the fair value of the contingent consideration that do not qualify
as measurement period adjustments depends on how the contingent consideration
is classified.
The d-wise deferred consideration which was contingent on the continued
employment of certain of the former management was initially excluded from the
total purchase consideration. However, the acquisition accounting on d-wise
has been adjusted for the year end which has resulted in the removal of the
element treated at half year as employment remuneration. As a result, the full
deferred consideration is now capitalisable and is included in the cost of
business combination.
Contingent consideration that is classified as an asset or a liability is
re-measured at subsequent reporting dates with the corresponding gain or loss
being recognised in statement of comprehensive income.
GOING CONCERN
The financial position of the Group, its cash flows and liquidity position are
set out in the primary statements within these financial statements.
Background
The Directors have adopted the going concern basis in preparing these
financial statements after careful assessment of identified principal risks
and the possible adverse impact on financial performance. The Directors have
assessed the financial position and liquidity at the end of the reporting
period and for the forecast period up to 30 April 2023, including sensitivity
analysis. The going concern period covers the 12 months from the date of
signing the financial statements. The process and key judgments in coming to
this conclusion are set out below.
The Group's activities, including the factors likely to affect its future
development, performance and position are set out in the Chairman's Statement
and Strategic report. The financial position of the Group, its cash flows,
liquidity position and borrowing facilities are described in the Financial
Review.
Current trading and liquidity
The Group's trading performance for the year ended 31 December 2021 has been
strong with Revenues of £46.0m and Adjusted EBITDA of £8.3m. Instem is fully
operational, with all staff in all territories working from home in accordance
with governmental guidelines, no staff have been furloughed and there is no
intention of curtailing any business activities. The company has continued to
recruit staff across its geographic footprint.
The Group signed a new financing arrangement on 8 April 2022, which consists
of a committed facility of £10m with HSBC UK Bank plc to support the Group's
working capital needs and its acquisition strategy, which can be extended up
to £20.0m if needed, subject to further bank approval. The financial
covenants have been considered in the forecast to ensure compliance. However,
as of 31 December 2021, the Group had a net overdraft facility of £0.5m and a
gross facility of £9.0m with NatWest Bank plc. As of 31 December 2021, the
net overdraft facility with NatWest Bank plc was undrawn (2020: undrawn).
Instem undertook an oversubscribed equity fund raise in July 2020, raising
£15.0m net of expenses. The fund raise placed the Group in a very strong cash
position which helped to accelerate the Group's acquisition strategy with the
acquisitions of the Edge, d-wise and PDS. The net cash used in investing
activities includes the net cash payment of £17.2m for purchasing those
subsidiaries (net of cash acquired).
The period 2021 saw again strong net cash generated from operations of £10.3m
(2020: £7.4m), largely due to operating cash inflows from the newly acquired
businesses, key contracts, outsourced services and effective working capital
management.
The proceeds of £0.8m ($1.1m) which were part of the US federal government
support for businesses during the COVID-19 pandemic have been fully forgiven
in 2021. As a result of the above and the positive organic cash generation
achieved in the period, the cash balance decreased from £26.7m to £15m.
The Group acquired the earnings enhancing, cash generative business of
Leadscope Inc, the Edge, d-wise, and PDS between November 2019 and September
2021, which have been steadily integrated within the Group during 2021.
The financial cash obligations associated with these acquisitions during 2022
are deferred and contingent consideration payments of £3.6m and £2.5m
respectively. The contingent consideration reflects management's estimate of a
100% probability that the entities target profitability will be achieved. The
amount of £1.1m payable to d-wise in relation to its contingent consideration
could be a combination of cash and shares of Instem plc at the discretion of
the Group.
Sensitivity Analysis
The Company has considered two scenarios which are also linked to the
company's risks when modelling the forecast results and cash flow. The
sensitivity assessment includes the trading performance and cash flows of the
three acquisitions occurred in 2023.
(a) Base Case Scenario
The Group's detailed forecasts and projections, taking account of potential
risks and uncertainties in the business, market and liquidity through
sensitivity analysis, show that the Group has adequate resources to enable it
to continue in operation through the forecast period ending 30 April 2023 from
the approval date of these Consolidated Financial Statements. Accordingly, the
Group continues to adopt the going concern basis in preparing its Consolidated
Financial Statements.
The uncertainty as to the future impact on the Group of the ongoing conflict
between Russia and Ukraine has been considered as part of the sensitivity
analysis and as part of Group's adoption of the going concern basis. We have
no customers, suppliers or staff in either territory. Thus far we have not
observed any material impact on our overall existing business or in the level
of new business opportunities that are being presented to us in the markets in
which we operate.
The Group has a significant proportion of recurring revenue (circa 52% of
total) from annual support & maintenance and SaaS contracts from a
well-established global customer base. Revenue is supported by a largely
fixed cost base comprising of staff and offices.
(b) Sensitised Scenario
Further stress testing has been carried out to ensure that the Group has
sufficient cash resources to continue its operations until at least 30 April
2023. In preparing this analysis the following key risks were included causing
a 35% loss of new business for the next twelve months and the risk effect of
foreign exchange movements, particularly between the USD and GBP. Despite the
negative impact of these sensitivities the model demonstrated that the Group
remained viable however, the cash balance was reduced over the going concern
period to April 2023.
In a worse scenario where many of the identified risks occurred, the Group
would take remedial action to counter the reduction in profit and cash through
a cost cutting and fund-raising exercise that would include staff
redundancies, general cost control measures. These further downside scenarios
are considered unlikely.
Conclusion and Going Concern Statement
After considering the uncertainties described above, the directors have a reasonable expectation that
the Group has adequate resources to continue in operational existence for the foreseeable future. For
these reasons, they continue to adopt the going concern basis in preparing
this annual report and accounts.
SIGNIFICANT JUDGEMENTS AND ESTIMATES
In the process of applying the Group's accounting policies, which are
described above, management
have made judgements and estimations about the future that have the most
significant effect on the amounts recognised in the financial statements.
The estimates and underlying assumptions are reviewed on an on-going basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period
of revision and future periods if the revision affects both current and future
periods.
Significant judgements
The following judgments have the most significant effect on the financial statements.
Revenue Recognition
The Group generates revenue from the provision of software licences, annual
support, SaaS subscriptions, subscription and support, professional services,
technology enabled outsourced services and consultancy services. Software
licences, professional services and annual support are often bundled together
in a contract which do not meet the criteria to be distinct performance
obligation.
Even though, the promise to transfer services to the customer are separately
identifiable, the nature of the promise, within the context of the contract,
is to transfer combined promised services. The goods or services are highly
interdependent, interrelated and the Group would not be able to fulfil its
promise by transferring each of the goods or services independently.
Judgement is applied in determining how many performance obligations there are
within each contract and the period in which these obligations will be
fulfilled and recognised as revenue, based on the Group's accounting policies.
For SaaS subscription, subscription and support and annual support the Group
determines for each contract whether the promise is considered to be a single
performance obligation as the subscription and support are highly
interdependent on one another given that the customers are required to take
the full package of both the software and support services i.e. Instem would
not be able to provide the support services without the provision of the
software nor provide the software without the support services.
Impairment of goodwill
In 2021, the CGUs are identified by the fact they are separate legal entities
and so have their own intangible and tangible assets, other current assets and
generate cash from their products and services that are separately
identifiable from one another. The judgements were made in respect of the
WACC, the revenue growth rate applied and the allocation of costs across the
CGUs.
The carrying value of goodwill must be assessed for impairment annually. This
requires a value in use estimate which is dependent on estimation of future
cashflows and the use of an appropriate discount rate to discount those cash
flows to their present value. The carrying value of goodwill as at 31 December
2021 was £34.6m (2020: £10.2m).
Management estimates discount rates using pre-tax rates that reflect current
market assessments of the time value of money and any risks specific to the
CGUs. The rates used to discount the future cashflows are based on the
Business Unit pre-tax weighted average cost of capital. Where a CGU operates
in multiple operating segments an average of the relevant WACCs has been used.
The revenue growth rates and margins are based on current Board-approved
budgets and forecasts covering a period of five years. Management estimates
are considering business growth rates, payroll and other cost base increases.
The data used for impairment testing procedures are directly linked to the
Group's latest budget, adjusted as necessary to exclude the effects of future
reorganisations and asset enhancements.
Development Costs
The Group invests on a continual basis in the development of software for sale to third parties. There
is a continual process of enhancements to and expansion of the software with judgement required in
assessing whether the development costs meet the criteria for capitalisation. These judgements have
been applied consistently year on year. In making this judgement, the Group evaluates, amongst other
factors, whether there are future economic benefits beyond the current period,
the stage at which technical feasibility has been achieved, management's
intention to complete and use or sell the product, the likelihood of success,
availability of technical and financial resources to complete the
development phase and management's ability to measure reliably the expenditure attributable to the
project. Judgement is therefore required in determining the practice for
capitalising development costs.
Estimation uncertainty
Information about estimations and assumptions that may have the most
significant impact on recognition and measurement of assets, liabilities,
income and expenses is provided below. Actual results may be substantially
different.
Provision for liabilities
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that the Group will
be required to settle the probable outflow of resources, and a reliable
estimate can be made of the amount of the obligation. As at 31 December
2021, the Group has a provision of £0.25m (2020: £0.25m) in respect of historical contract disputes as
the directors have considered that the above provision conditions have been
met. The provision
represents the best estimate of the risks and considers all information and legal input received by the
Group.
Contingent consideration
Where acquisition consideration includes consideration contingent on
performance outcomes being met, the consideration is valued at the acquisition
date based on performance forecasts available at the time. Those forecasts are
reviewed at the reporting date and the consideration revised where materially
different.
Pension scheme
As stated above the Group operates a defined benefit pension scheme. At the
end of each six-monthly reporting period the Group seeks external expert
actuarial advice on the assumptions to apply to the calculation of the
scheme's liabilities. The Group then engages a separate, independent firm of
pension advisors to calculate the scheme surplus or deficit at the reporting
date for accounting purposes. The scheme deficit at 31 December 2021 is £2.0m
(2020: £3.9m).
Revenue Recognition
For Professional services and technology enabled outsourced services revenue
recognition there is a significant estimation of the planned project hours,
which determines the percentage of completion of service revenue contracts.
Before the project is started, the project manager estimates the
budgeted hours needed for the agreed services. If the project is expected to overrun, then the project
manager will amend the expected budgeted hours in accordance with
the new available information which also mitigates the risk of early revenue
recognition.
2 REVENUE FROM CONTRACTS WITH CUSTOMERS
Segmental reporting
The Group has disaggregated revenue into various categories in the following
tables which are intended to depict how the nature, amount, timing and
uncertainty of revenue and cash flows are affected by economic factors.
The Group's Chief Operating Decision Maker (CODM) is its chief executive and
he monitors the performance of these operating segments as well as deciding on
the allocation of resources to them alongside with the executive management
team.
Historically the Group's finance systems have recorded costs centrally and
have managed costs in this way. Over recent years the Group has expanded both
organically and through acquisition, increasing the number of products and
services offered and in 2020 the Group reported through three operating
segments, Study Management, Regulatory Solutions and In Silico Solutions.
During 2021 the fourth segment, Clinical Trial Acceleration (CTA), was
established after following the acquisition of d-wise.
During 2020 this system enabled more centrally recorded costs to be allocated
to the individual segments and that process was further developed during 2021.
The operations of the Group are managed centrally with group-wide functions
including sales, marketing, software development, information technology,
customer support, human resources and finance & administration. The CTA
segment already bears the majority of its costs directly and as such reports a
lower direct contribution margin to central overheads than the other three
segments. The expectation in future years is to be able to allocate more
centrally held operational costs to the individual segments as internal
reporting systems evolve, thereby assisting the Board to use the segmental
cost information for meaningful decision making.
The operations of the Group are managed centrally with group-wide functions
including sales, marketing, software development, IT, customer
support, human resources and finance & administration.
The analysis provided below reflects costs directly attributable to the
respective segments in 2021 and 2020, which are primarily third party costs of
sale and costs of allocated employees. The remaining indirect operational
costs are accounted for centrally and are not allocated to specific segments.
SEGMENTAL REPORTING Study Management Regulatory Solutions In Silico Solutions Clinical Trial Acceleration
2021 Total
£000 £000 £000 £000 £000
Total revenue 20,259 10,010 3,042 12,706 46,017
Direct attributable costs (10,388) (6,016) (1,681) (11,308) (29,393)
______ ______ ______ ______ ______
Contribution to indirect overheads 9,871 3,994 1,361 1,398 16,624
Contribution to indirect overheads % 49% 40% 45% 11%
Central unallocated indirect costs (8,374)
______
Adjusted EBITDA 8,250
Depreciation (312)
Amortisation of intangibles arising on acquisitions (1,563)
Amortisation of internally generated intangibles (851)
Depreciation of right of use assets (945)
______
OPERATING PROFIT BEFORE NON-RECURRING COSTS 4,579
Non-recurring costs (1,286)
Non-recurring income 805
______
OPERATING PROFIT AFTER NON-RECURRING COSTS 4,098
Finance income 30
Finance costs (1,144)
______
PROFIT BEFORE TAXATION 2,984
SEGMENTAL REPORTING Study Management Regulatory Solutions In Silico Solutions Clinical Trial Acceleration
2020 Total
£000 £000 £000 £000 £000
Total revenue 15,054 9,839 3,324 - 28,217
Direct attributable costs (3,516) (2,046) (1,630) - (7,192)
______ ______ ______ ______ ______
Contribution to indirect overheads 11,538 7,793 1,694 - 21,025
Contribution to indirect overheads % 77% 79% 51%
Central unallocated indirect costs (15,106)
______
Adjusted EBITDA 5,919
Depreciation (138)
Amortisation of intangibles arising on acquisitions (664)
Amortisation of internally generated intangibles (736)
Depreciation of right of use assets (572)
______
OPERATING PROFIT BEFORE NON-RECURRING COSTS 3,809
Non-recurring costs (606)
______
OPERATING PROFIT AFTER NON-RECURRING COSTS 3,203
Finance income 38
Finance costs (692)
______
PROFIT BEFORE TAXATION 2,549
REVENUE BY PRODUCT TYPE 2021 2020
£000 £000
Licence fees 4,597 3,477
Annual support fees 14,378 8,917
SaaS subscription and support fees 9,704 8,024
Professional services 3,651 1,603
Technology enabled outsourced services 6,378 6,196
Consultancy services 7,309 -
______ ______
46,017 28,217
REVENUE BY GEOGRAPHICAL LOCATION 2021 2020
£000 £000
UK 3,540 2,740
Europe 7,477 5,656
USA 26,831 13,050
Rest of World 8,169 6,771
______ ______
46,017 28,217
NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION BY GEOGRAPHICAL LOCATION 2021 2020
£000 £000
UK 56,925 17,549
Europe 1,895 1,436
USA 1,812 524
Rest of World 433 622
______ ______
61,065 20,131
There were no customers that represented more than 10% of the Group's revenue
in 2021 (2020: none).
3 Non recurring items
2021 2020
Non recurring cost £000 £000
Guaranteed Minimum Pension (GMP) equalisation provision - 5
Legal costs relating to historical contract disputes 95 149
Acquisition costs 1,019 452
Share based payments 172 -
1,286 606
2021 2020
Non recurring income £000 £000
US government loans forgiven 805 -
805 -
Non recurring costs in the year include acquisition costs of £1.0m relating
to the acquisitions of The Edge, d-wise and PDS. The share based payments
charge of £0.2m relate to options that were re-issued in 2021 and vested
immediately.
The non recurring income of £0.8m ($1.1m) relates to US federal government
COVID-19 support loans which were forgiven during 2021 and there are no
unfulfilled conditions or contingencies related to this income.
4 Finance income
2021 2020
£000 £000
Right of use asset interest income 6 7
Other interest 24 31
30 38
5 Finance costs
2021 2020
£000 £000
Loans and overdrafts 85 38
Unwinding discount on deferred consideration 867 70
Net interest charge on pension scheme 51 34
Right of use asset interest cost 97 96
Foreign exchange losses 44 454
1,144 692
6 Taxation
2021 2020
Income taxes recognised in profit or loss: £000 £000
Current tax:
UK corporation tax in respect of previous years (269) (4)
Adjustments in respect of R&D tax credit 351 250
Foreign tax (1,111) (146)
Foreign tax in respect of previous years (54) 39
_______ _______
Total current tax (charge)/credit (1,083) 139
_______ _______
Deferred tax:
Current year charge (147) (165)
Adjustment in respect of previous years 575 (57)
Defined benefit liability (91) (90)
Impact of rate change (560) (102)
_______ _______
Total deferred tax credit/(charge) (223) (414)
_______ _______
Total income tax charge recognised in the current year (1,306) (275)
7 Leases
Nature of leasing activities in the capacity of lessee
The Group leases a number of offices in the jurisdictions from which it
operates. In these jurisdictions the periodic rent is fixed over the lease
term, with inflationary increases incorporated into the fixed payments
stipulated in the lease agreements. Where rental agreements include market
rate escalations, the lease liability is re-measured when the change in cash
payments takes effect. The Group also leases one vehicle and certain
equipment. Leases of vehicle and equipment comprise only fixed payments over
the lease terms. With the exception of short term leases, leases of low value
underlying assets and a lease held for a telephone system, with less than
twelve months remaining on the lease as at 31 December 2021, each lease is
reflected on the balance sheet as a right of use asset and a lease liability.
Each lease generally imposes a restriction that, unless there is a contractual
right for the Group to sublet the asset to another party, the right of use
asset can only be used by the Group. Leases are either non cancellable or may
only be cancelled by incurring a termination fee. Two leases that came with
the acquisitions could be terminated in a subject of notice. Some leases
contain an option to extend the lease for a further term. For office leases
the Group must keep those properties in a good state of repair and return the
properties in their original condition at the end of the lease.
The table below describes the nature of the Groups leasing activities by type
of right of use asset recognised on the balance sheet:
No of leases with extension options No of leases with options to purchase No of leases with payments linked to an index No of leases
No of right of use assets leased Average remaining lease term with termination options
Right of use assets
Office buildings 14 2.3 years 10 0 1 2
Vehicles 1 1.9 years 0 0 0 0
Equipment 1 0.5 years 0 0 0 0
Land & buildings Motor
Right of use assets vehicles Equipment Total
£000 £000 £000 £000
As at 1 January 2020 2,158 7 - 2,165
Additions 123 31 - 154
Lease modification and remeasurement 32 - - 32
Depreciation (564) (8) - (572)
Exchange adjustment (38) - - (38)
As at 31 December 2020 1,711 30 - 1,741
Additions 261 - - 261
Acquisitions 539 - 410 949
Restoration costs 70 - - 70
Depreciation (686) (10) (249) (945)
Exchange adjustment (5) - 6 1
As at 31 December 2021 1,890 20 167 2,077
Land & Motor
Lease liabilities buildings vehicles Equipment Total
£000 £000 £000 £000
As at 1 January 2020 2,563 6 - 2,569
Additions 123 31 - 154
Lease modification and 32 - - 32
Remeasurement
Interest expense 95 - - 95
Lease payments (710) (6) - (716)
Exchange adjustment (50) - - (50)
As at 31 December 2020 2,053 31 - 2,084
Additions 261 - - 261
Acquisitions 539 - 410 949
Interest expense 84 1 11 96
Lease payments (795) (11) (253) (1,059)
Exchange adjustment (9) - 3 (6)
___ _ _ ___
As at 31 December 2021 2,133 21 171 2,325
Reconciliation of movements of lease liabilities to cash flows arising from
financing activities.
Land & Motor
Changes from financing cash buildings vehicles Equipment Total
flows
£000 £000 £000 £000
Interest expenses 95 - - 95
Payment of lease liabilities 615 6 - 621
At 31 December 2020 710 6 - 716
Interest expenses 83 1 12 96
Payment of lease liabilities 712 10 241 963
At 31 December 2021 795 11 253 1,059
Lease liability maturity analysis:
As at 31 December 2020
1 year or less 2 to 5 years After five years Total
£000 £000 £000 £000
Lease liabilities 488 1,538 58 2,084
As at 31 December 2021
1 year or less 2 to 5 years After five years Total
£000 £000 £000 £000
Lease liabilities 1,077 1,229 19 2,325
The Group has elected not to recognise a lease liability for short term leases
(leases with an expected term of 12 months or less) or for leases of low value
assets. Payments made under such leases are expensed on a straight-line basis.
The following amounts in respect of leases, where the company is a lessee, have been recognised in
consolidated statement of comprehensive income:
2021 2020
£000 £000
Expenses relating to short-term leases 159 45
Low value lease expense 81 95
Interest expense 96 95
Amortisation of right of use assets 945 572
The total cash outflow for leases in 2021 was £1.0m (2020: £0.7m).
8 Earnings per share
Basic and diluted earnings per share
Basic earnings per share are calculated by dividing the profit attributable to
ordinary shareholders by the weighted average number of ordinary shares in
issue during the year. Diluted earnings per share is calculated by adjusting
the weighted number of ordinary shares outstanding to assume conversion of all
dilutive potential shares arising from the share option scheme.
The deferred and contingently issuable shares in relation to d-wise
acquisition which could potentially dilute the basic EPS in the future were
not included in the calculation of diluted EPS because they are antidilutive
for the period of 2021.
The dilutive impact of the share options is calculated by determining the
number of shares that could have been acquired at fair value (determined as
the average market share price of the Company's shares) minus the issue
price. The number of the ordinary shares that could have been acquired at
their average market price during the period are ignored. However, the shares
that would generate no proceeds and would not have effect on profit or loss
attributable to ordinary shares outstanding are included.
2021 2020
Profit after tax Weighted average number of shares Profit per share Profit after tax Weighted average number of shares Profit per share
'000 '000
£000 Pence £000 Pence
Earnings per share - Basic
1,678 21,591 7.8 2,274 18,421 12.3
Potentially dilutive shares
- 1,128 - - 1,231 -
_______ _______ _______ _______ _______ _______
Earnings per share - Diluted
1,678 22,719 7.4 2,274 19,652 11.6
_______ _______ _______ _______ _______ _______
Adjusted earnings per share
Adjusted earnings per share is calculated after adjusting for the effect of
foreign currency exchange on the revaluation of inter-group balances included
in finance income/(costs), non-recurring items, impairment of goodwill and
capitalised development and amortisation of intangibles on acquisitions.
Diluted adjusted earnings per share is calculated by adjusting the weighted
number of ordinary shares outstanding to assume conversion of all dilutive
potential shares arising from the share option scheme. The dilutive impact
of the share options is calculated by determining the number of shares that
could have been acquired at fair value (determined as the average market share
price of the Company's shares) based on the monetary value of the subscription
rights attached to the outstanding share options.
2021 2020
Adjusted Profit after tax Weighted average number of shares Adjusted Earnings per share Adjusted Profit after tax Weighted average number of shares Adjusted Earnings per share
'000 '000
£000 Pence £000 Pence
Earnings per share - Basic
3,704 21,591 17.2 3,752 18,421 20.4
Potentially dilutive shares
- 1,128 - 1,231 -
_______ _______ _______ _______ _______ _______
Earnings per share - Diluted
3,704 22,719 16.3 3,752 19,652 19.1
_______ _______ _______ _______ _______ _______
2021 2020
£000 £000
Reconciliation of adjusted profit before tax:
Reported profit before tax 2,984 2,549
Non-recurring costs 1,286 606
Non-recurring income (805) -
Amortisation of acquired intangibles 1,563 664
Impairment of goodwill and capitalised development costs - -
Foreign exchange differences on revaluation of inter-group balances (18) 208
_______ _______
Adjusted profit before tax 5,010 4,027
Tax (1,306) (275)
_______ _______
Adjusted profit after tax 3,704 3,752
_______ _______
Profit after tax 1,678 2,274
___ ___ ___ ___
9 Acquisition of The Edge Software Consultancy Ltd ('The Edge')
On 1 March 2021, Instem acquired 100% of the issued share capital of The Edge.
The acquisition has increased the group's market share in the global Life
Science Sector and complements the group in continuing its expansion and
development in this industry.
Proportion of voting equity interests acquired
%
Date of acquisition Consideration
Company Principal activity £000
The Edge Provider of Discovery Technology Solutions software and services to Life
Science sector
1 March 2021 100 9,221
Details of the purchase consideration, the net assets acquired and goodwill
are as follows:
Consideration
£000
Initial cash paid 5,500
Initial share consideration 2,000
Deferred consideration - cash payable March 2022 500
Contingent consideration - cash payable by June 2022 1,000
Contingent consideration - cash payable March 2023 1,000
Working capital and cash adjustment - cash receivable March 2022 (67)
Total consideration 9,933
Discounting of estimated future cashflows (712)
Present value of consideration 9,221
The initial share consideration was satisfied by the issue of 391,920 new
Instem plc ordinary shares at a value of £2.0m which was based on the
published share price. The premium arising on the share issue of £2.0m has
been credited to the merger relief reserve.
The appropriate discounting has been applied to the debt instruments.
The deferred consideration is not based on any performance related conditions
and is payable in March 2022. The contingent consideration is based on certain
performance related conditions in the twelve- month period post-completion.
The contingent consideration in the table above is based on the forecast
estimate that the performance related conditions will be fully met and the
full consideration will be payable. The contingent consideration was
re-measured at the reporting date. The deferred consideration had been
discounted using Instem's estimated cost of borrowing and the contingent
consideration has been discounted using the company's Internal Rate of Return
('IRR').
Acquisition related costs amounting to £0.2m have been recognised as an
expense within non-recurring items in the Consolidated Statement of
Comprehensive Income.
Fair value of assets acquired and liabilities recognised at the date of
acquisition
Fair Value
£000
Non-Current Assets
Customer relationships 2,550
Intellectual property 1,342
Brand 105
Right of use assets 37
Current Assets
Cash and cash equivalents 2,570
Trade and other receivables 407
Deferred tax asset 64
Current Liabilities
Trade and other payables (430)
Deferred income (555)
Lease liabilities (36)
Non-Current Liabilities
Deferred tax on acquisition (759)
Fair value of identifiable net assets acquired 5,295
Goodwill arising on acquisition
£000
Consideration transferred 9,221
Less: fair value of identifiable net assets (5,295)
Goodwill arising on acquisition 3,926
Goodwill
Goodwill of £3.9m primarily relates to the ability to generate growth from
new customers, synergies provided by the Group and the skill and expertise of
The Edge's staff.
Identifiable net assets
A provisional fair value exercise to determine the fair value of assets and
liabilities acquired has been carried out. Fair values are provisional as they
are within the twelve month hindsight period to adjust fair values. No fair
value adjustments have been made to the assets and labilities acquired.
The fair value of intangible assets are:
· Customer relationships of £2.6m calculated using the income
approach - excess earnings. Acquired customer relationships consisting of
ongoing relationships with companies to which The Edge provides annual
licenses, maintenance assistance and bespoke services.
· Intellectual property of £1.3m calculated using the income
approach - relief from royalty. Two proprietary software packages were
acquired, namely BioRails and Morphit.
· Brands of £0.1m calculated using the income approach - relief
from royalty. 'The Edge' brand and sub-brands (principally BioRails and
Morphit) are considered in aggregate a separable intangible asset and a driver
of the overall business model.
Acquired receivables
The fair value of acquired trade receivables is £0.079m as no loss allowance
was required to be recognised on acquisition.
Impact of acquisition on the results of the Group
The acquired business contributed revenues of £1.9m and net profit of £1.2m
to the group for the period from 1 March to 31 December 2021.
If this business combination had been in effect at 1 January 2021, the revenue
of The Edge would have been £2.3m and the profit for the year would have been
£1.4m. These values do not represent a measure of the performance of The Edge
as the company's accounting policy have been changed at the acquisition date
to comply with the policies of the Group.
Purchase consideration - cash outflow
£000
Outflow of cash to acquire subsidiary, net of cash acquired
Initial cash consideration 4,000
Net cash adjustment (after deduction of estimated debt) 1,500
Less: Balance
acquired
Cash (2,570)
Net outflow of cash - investing activities 2,930
10 Acquisition of d-wise Technologies, Inc
On 20 March 2021, Instem exchanged contracts to acquire the 100% of the issued
share capital of US-based clinical trial technology & consulting leader
d-Wise Technologies, Inc ("d-wise"). The acquisition was completed on 1 April
2021. The acquisition has increased the group's market share in the global
Life Science Sector and complements the group by entering an attractive
adjacent area of clinical trial analysis and submission.
Proportion of voting equity interests acquired
%
Date of acquisition Consideration
Company Principal activity £000
d-wise Provider of clinical trial acceleration solutions to Life Science sector
1 April 2021 100 22,022
Details of the purchase consideration excluding conditional deferred
consideration, the net assets acquired and goodwill are as follows:
Consideration
$000 £000
Initial cash consideration 13,000 9,437
Initial share consideration 7,000 5,044
Deferred consideration (1 April 2022) - To be settled in cash 3,128 2,271
Deferred consideration (1 April 2022) - To be settled in shares 1,042 756
Deferred consideration (1 April 2023) - To be settled in cash 4,347 3,156
Contingent consideration (1 March 2022) - To be settled in cash or shares 1,500 1,089
Contingent consideration (1 March 2023) - To be settled in cash 1,500 1,089
Working capital adjustment - (Q3 2021) - Settled in cash 5 4
Total consideration
31,522 22,846
Discounting of estimated future cashflows (824)
Present value of consideration 22,022
The initial share consideration was satisfied by the issue of 868,203 new
Instem plc ordinary shares at a value of $7.0m (£5.0m) which was based on the
published share price. The premium arising on the share issue of £5.0m has
been credited to the merger relief reserve.
The appropriate discounting has been applied to the debt instruments.
The deferred consideration is not based on any performance related conditions
and is payable in two instalments in April 2022 and 2023. The contingent
consideration is based on certain performance related conditions in the
twelve-month period post-completion. The deferred consideration has been
discounted using the interest rate as defined in the share purchase agreement
and the contingent consideration has been discounted using the company's IRR.
The deferred and contingent consideration to be settled in shares should be
equal the nominal value of the deferred and contingent promissory note,
divided by the average closing price of Instem Stock.
The contingent consideration in the table above is based on the forecast
estimate that the performance related conditions will be fully met and the
full consideration will be payable. The contingent consideration was
re-measured at the reporting date.
Acquisition related costs amounting to £1.2m have been recognised as an
expense within non-recurring items in the Consolidated Statement of
Comprehensive Income.
Fair value of assets acquired and liabilities recognised at the date of
acquisition
Fair Value
£000
3 Non-Current Assets
Customer relationships 6,094
Intellectual property 1,061
Brand names 1,134
Property, plant and equipment 491
Right of use assets 662
Current Assets
Trade and other receivables 5,765
Cash and cash equivalents 1,800
Accrued Income 551
Current Liabilities
Trade and other payables (1,634)
Deferred income (4,230)
Financial Liabilities (48)
Lease liability (662)
Non-Current Liabilities
Deferred tax on acquisition (2,072)
Fair value of identifiable net liabilities acquired 8,912
Goodwill arising on acquisition
£000
Consideration transferred 22,022
Less: fair value of identifiable net assets (8,912)
Goodwill arising on acquisition 13,110
Goodwill
Goodwill of £13.1m primarily relates to the ability to enter an attractive
adjacent area of clinical trial analysis and submission, generating growth
from new customers, synergies provided by the Group and the skill and
expertise of the d-wise staff.
Identifiable net assets
A provisional fair value exercise to determine the fair value of assets and
liabilities acquired has been carried out. Fair values are provisional as they
are within the twelve month hindsight period to adjust fair values. Except for
the Deferred revenue no other fair value adjustments have been made to the
assets and liabilities acquired.
The fair value of intangible assets are:
· Customer relationships of £6.1m calculated using the income
approach - excess earnings. Acquired customer relationships consisting of
ongoing relationships with companies to which d-wise provides hosting and
consultancy services, support and maintenance and product licences.
· Intellectual property of £1.1m calculated using the income
approach - relief from royalty. Two proprietary software products were
acquired, namely Blur and Reveal.
· Brands of £1.1m calculated using the income approach - relief
from royalty. The 'd-wise' brand is a separable intangible asset and a driver
of the overall business model in the fair value measurement and the proportion
of overall enterprise value attributed to the brand. The brand has been
trading since 2003 and is well established within the pharmaceutical industry.
Acquired receivables
The fair value of acquired trade receivables is £5.1m as no loss allowance
was required to be recognised on acquisition.
Impact of acquisition on the results of the Group
Profit for the year end includes a profit of £0.5m attributable to the
additional business generated by d-wise from 1 April to 31 December 2021.
Revenue for the year includes £12.7m in respect of d-wise.
If this business combination had been effected at 1 January 2021, the revenue
of d-wise would have been £17.3m and the profit for the year would have been
£1m. The directors consider these values represent an approximate measure of
the performance of d-wise on a yearly basis as the fair value adjustment on
the acquired deferred revenue needed to be considered for the future periods.
Purchase consideration - cash outflow
£000
Outflow of cash to acquire subsidiary, net of cash acquired
Initial cash consideration 9,437
Working capital adjustment - (Q3 2021) - Settled in cash 4
Less: Balance acquired
Cash (1,800)
Net outflow of cash - investing activities 7,641
11 Acquisition of PDS Pathology Data Systems Ltd
On 1 September 2021, Instem acquired the 100% of the issued share capital of
PDS Pathology Data Systems Ltd ("PDS"), a life sciences software company with
headquarters in Switzerland and offices in the United States and Japan. The
acquisition has increased the group's market share in the global Life Science
Sector and complements the group in continuing its expansion and development
in this industry.
Proportion of voting equity interests acquired
%
Date of acquisition Consideration
Company Principal activity £000
PDS Provider of Discovery Technology Solutions for non-clinical study management
and regulatory software and services
1 September 2021 100 9,309
Details of the purchase consideration excluding the benefit of their former
PDS's shareholders, the net assets acquired and goodwill are as follows:
Consideration
CHF000 £000
Initial cash paid 7,131 5,665
Initial share consideration 3,500 2,790
Deferred consideration (1 September 2022) - To be settled in cash 1,000 794
Working capital adjustment - (Q3 2021) - Settled in cash 99 79
Total consideration
11,730 9,328
Discounting of estimated future cashflows (19)
Present value of consideration 9,309
The initial share consideration was satisfied by the issue of 359,157 new
Instem plc ordinary shares at a value of CHF3.5m (£2.8m) which was based on
the published share price. The premium arising on the share issue of £2.75m
has been credited to the merger relief reserve.
The appropriate discounting has been applied to the debt instruments.
The deferred consideration is not based on any performance related conditions
and is payable in in September 2022. The deferred consideration has been
discounted using the PDS'S weighted average cost of capital (WACC).
Instem plc acquired also the benefit of the former PDS's shareholder loan for
a consideration of CHF3m (£2.4m) which was excluded from the total purchase
consideration and is recorded as intercompany balance between Instem plc and
PDS. The above treatment will not affect the Group's cash position as the
total consideration payable remains at CHF14,7m.
Acquisition related costs amounting to £0.3m have been recognised as an
expense within non-recurring items in the Consolidated Statement of
Comprehensive Income.
Fair value of assets acquired and liabilities recognised at the date of
acquisition
Fair Value
£000
3 Non-Current Assets
Customer relationships 2,047
Intellectual property 1,607
Brand names 153
Property, plant and equipment 34
Right of use assets 251
Current Assets
Trade and other receivables 528
Cash and cash equivalents 1,475
Accrued Income 9
Current Liabilities
Trade and other payables (249)
Deferred income (708)
Loan from former PDS's shareholders (2,387)
Lease liability (251)
Non-Current Liabilities
Deferred tax on acquisition (568)
Provisions (40)
Fair value of identifiable net liabilities acquired 1,901
Goodwill arising on acquisition
£000
Consideration transferred 9,309
Less: fair value of identifiable net assets (1,901)
Goodwill arising on acquisition 7,408
Goodwill
Goodwill of £7.4m primarily relates to the ability to enter an attractive
adjacent area of clinical trial analysis and submission, generating growth
from new customers, synergies provided by the Group and the skill and
expertise of the d-wise staff.
Identifiable net assets
A provisional fair value exercise to determine the fair value of assets and
liabilities acquired has been carried out. Fair values are provisional as they
are within the twelve month hindsight period to adjust fair values. Except for
the Deferred revenue no other fair value adjustments have been made to the
assets and liabilities acquired.
The fair value of intangible assets are:
· Customer relationships of £2.1m calculated using the income
approach - excess earnings. Acquired customer relationships consisting of
ongoing relationships with companies to which PDS provides licenses, hosting
services, support and maintenance, and other services.
· Intellectual property of £1.6m calculated using the income
approach - relief from royalty. Two proprietary software products were
acquired, namely LIMS and TRANSEND.
· Brands of £0.2m calculated using the income approach - relief
from royalty. The 'PDS' brand is a separable intangible asset and a driver of
the overall business model in the fair value measurement and the proportion of
overall enterprise value attributed to the brand. The brand has been trading
since 1981 and is well established n the life-science industry.
Acquired receivables
The fair value of acquired trade receivables is £0.4m as no loss allowance
was required to be recognised on acquisition.
Impact of acquisition on the results of the Group
Profit for the year includes a loss of £0.1m attributable to the additional
business generated by PDS from 1 September to 31 December 2021. The loss was
incurred due to fair value adjustment on the acquired deferred revenue of
£0.1m. Revenue for the year includes £1.4m in respect of PDS.
If this business combination had been effected at 1 January 2021, the revenue
of PDS would have been £4.3m and the loss for the year would have been
£0.05m. The directors consider these values represent an approximate measure
of the performance of PDS on a year basis as the fair value adjustment on the
acquired deferred revenue needed to be considered for the future periods.
Purchase consideration - cash outflow
£000
Outflow of cash to acquire subsidiary, net of cash acquired
Initial cash consideration 3,701
Management participation, commission and bonus - Settled in cash 1,964
Former PDS's shareholder loan 2,387
Working capital adjustment - (Q3 2021) - Settled in cash 79
Less: Balance acquired
Cash (1,475)
Net outflow of cash - financing and investing activities 6,656
The benefit of the former PDS's shareholder loan has been presented as a
financing cash flow as does not form part of the consideration transferred
12 Provision for liabilities
2021 2020
£000 £000
At 1 January 250 250
Acquisition 41 -
Increase in provision during the year - -
At 31 December 291 250
The Group holds a provision of £0.25m (2020: £0.25m) in respect of
historical contract disputes against a maximum exposure of approximately
£3.8m (2020: £4.0m). The maximum exposure includes additional claims for
consequential losses. There are uncertainties around the outcome of contract
disputes and any settlements may be higher or lower than the amount provided.
The directors believe the provision represents the best estimate of the risks
and considers all information and legal input received by the Group. The
assumptions made in relation to the current period are consistent with those
in the prior year. The utilisation of this provision is still expected to
happen within two years due to the legal process taking longer than originally
anticipated.
The amount of £0.04m relates to the general provision that PDS provided for
warranty and remained unchanged as of 31 December 2021 based on management
estimates.
13 Subsequent events
No adjusting events have occurred between the 31 December reporting date and
the date of approval of these financial statements.
An historical contractual licence dispute, which does not affect the ongoing
operations of the Group, was heard by a German court on 17 March 2022 and the
official outcome is awaited. The Group has been defending the action and
strongly believes that the claim should be dismissed.
Notwithstanding this, the cost provision of £0.25m made in 2017 has been
maintained in the 2021 financial statements. As the potential financial
outcome cannot yet be determined with any certainty the Board has concluded
that the £0.25m provision was appropriate at 31 December 2021. To date all
legal expenses have been expensed.
On 8 April 2022, the Group signed a new financing arrangement which consists
of a committed facility of £10.m with HSBC UK Bank plc to support the Group's
working capital needs and its acquisition strategy, which can be extended up
to £20.0m if needed, subject to further bank approval. The financial
covenants have been considered in the forecast to ensure compliance.
14 Approval
The Preliminary Announcement was approved by the Board of Directors on 26
April 2022.
15 Preliminary Announcement
A copy of this Preliminary Announcement is available on request to all
Shareholders by post from the Company Secretary, (2
Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD).
The announcement can also be accessed on the Internet at
https://investors.instem.com. The 2021 Annual Report will be made available on
the Group's website (www.instem.com (http://www.instem.com/) ) on or before 16
May 2022.
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 (mailto:rns@lseg.com)
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