Instem plc
Annual Report 2016

Plain-text annual report

Instem plc Annual Report 2016 Instem is a leading supplier of IT applications and technology-enabled outsourced services to the early development global life sciences market. Instem solutions are used by customers worldwide, meeting the rapidly expanding needs of life science and healthcare organisations for data-driven decision making that help them bring their life enhancing products to market faster. Instem is creating a more connected ecosystem in the life sciences by consolidating a fragmented vendor marketplace. Their established portfolio of software solutions increase client productivity by automating processes while offering the unique ability to generate new knowledge through the extraction and harmonisation of actionable scientific information. Instem supports over 500 clients through offices in the United States, United Kingdom, France, India, China and Japan. Our clients include these fine organisations... Contents HIGHLIGHTS CHAIRMAN’S STATEMENT STRATEGIC REPORT FINANCIAL REVIEW BOARD OF DIRECTORS CORPORATE GOVERNANCE STATEMENT DIRECTORS’ REPORT DIRECTORS’ REMUNERATION REPORT DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INSTEM PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION COMPANY STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOWS COMPANY STATEMENT OF CASH FLOWS CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY ACCOUNTING POLICIES NOTES TO THE FINANCIAL STATEMENTS DIRECTORS AND ADVISORS 3 5 7 11 13 15 18 20 22 23 24 25 26 27 28 29 30 36 73 Instem plc Annual Report, 2016 1 s t h g i l h g h i 2 Instem plc Annual Report, 2016 Highlights Financial Highlights • Revenues increased 12% to £18.3m (2015: £16.3m) • Recurring revenues increased 21% to £12.1m (2015: £10.0m) • Software as a Service (SaaS) revenues increased • • • • • • 38% to £2.9m (2015: £2.1m) EBITDA* of £1.3m (2015: £2.5m) Adjusted** profit before tax of £0.7m (2015: £1.7m) Reported profit before tax of £0.02m (2015: loss before tax of £0.4m) Basic earnings per share of 6.9p (2015: loss of 3.5p) Adjusted** fully diluted earnings per share of 11.2p (2015: 12.9p) Net cash balance as at 31 December 2016 of £4.2m (2015: £2.2m) Operational Highlights • Oversubscribed placing to raise £5.0m (gross) in February 2016 to fund acquisitive growth: • Acquisition in May 2016 of Samarind Limited, a Regulatory Information Management solutions provider, for a maximum consideration of £2.5m • Acquisition in Sept 2016 of Notocord, a software provider in pre-clinical studies, for a maximum consideration of €4.2m (£3.6m) • • Disappointing performance from Instem Clinical is being addressed through decisive management actions following strategic reappraisal Strong trading across all other business areas: • Secured the majority of SEND (“Standard for Exchange of Non-clinical Data”) related technology and outsourced services contracts placed in the market • Successfully established KnowledgeScan Target Safety Assessment service, delivering 14 assignments, with repeat business from every client • High levels of Provantis® contract renewals, including a long-term relationship with Charles River Laboratories, by far the largest pre-clinical CRO (contract research organisation) • Record revenue and profit contribution from Perceptive Instruments, our genetic toxicology product suite • Investment in the Sales and Operational teams and infrastructure to fund on-going growth “With the exception of the disappointing performance of Instem Clinical, business in 2016 was strong, helped by a buoyant pre-clinical market, the target for the majority of our products and services. Revenues grew both organically and through the acquisitions of Samarind and Notocord. Recurring revenue and SaaS revenue growth of 21% and 38%, respectively, were particularly pleasing. A more conservative revenue outlook for Instem Clinical in 2017 is expected to be more than offset by the growing momentum of our KnowledgeScan big data analytics and insights service, introduced in 2016, and the full year contributions from the Samarind and Notocord acquisitions. The FDA mandate of SEND in December 2016 fuelled market demand for our software and technology enabled out-sourced services and we anticipate strong revenue growth in line with expectations, however we will continue to invest in additional staff and facilities in this area during 2017 to ensure we maximise market share and retain our substantial market leadership as the FDA regulations drive further market growth. While near term profit will be significantly reduced by this and other investment across the Group, we are putting in place a platform for further growth in the longer term.” P J Reason Chief Executive * Earnings before interest, tax, depreciation, amortisation and non-recurring income/(costs). **After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/ (costs), non-recurring items and amortisation of intangibles on acquisitions. Profit is adjusted in this way to provide a clearer measure of underlying operating performance. Instem plc Annual Report, 2016 3 INVESTMENT “We have continued to invest in our business to both increase the depth of management expertise and enhance the various software product offerings across the Group.” 4 Instem plc Annual Report, 2016 t n e m e t a t s Chairman’s Statement The period under review was undoubtedly a frustrating year for the Group, due wholly to the disappointing performance of Instem Clinical. Importantly, we successfully achieved a significant equity fundraise at the beginning of the year and subsequently completed two strategic acquisitions. We also managed strong revenue growth across the majority of our businesses and significantly strengthened our senior management team. Nevertheless, the poor performance of our Clinical business ultimately resulted in trading for the Group, disappointingly, coming in below our expectations for the year. over 50 SEND-related contracts in 2016. In order to capitalise on the opportunities to provide services, as well as software, we are investing in additional staff and facilities, further details of which are included in the Chief Executive’s Statement. Furthermore, we introduced a new bio-informatics platform, KnowledgeScan, which achieved significant market recognition in its first application area of Target Safety Assessment (“TSA”). In the second half of the year we delivered several TSA projects with high levels of customer repeat business. Notwithstanding the above, we have continued to invest in our business to both increase the depth of management expertise and enhance the various software product offerings across the Group. In particular, the appointment of MaryBeth Thompson as Chief Operating Officer, who brings more than 18 years of relevant experience to the role, is strategically important to the Group as it will enable the rest of the senior management team to increase their focus on delivering further organic growth and continuing our strategic acquisition programme. I am pleased to report that the recent acquisitions of Samarind and Notocord are performing in line with expectations and are on track to be fully integrated in 2017 and we are now seeking to consolidate the full cross and upselling opportunities for both businesses as part of the larger group. Importantly, our Preclinical and Regulatory Solutions businesses maintained their pre-eminent industry positions by continuing to win the majority of business placed globally in their markets. In particular, our submit™, Standard for the Exchange of Non-clinical Data (“SEND”) technology suite has already demonstrated market dominance, winning the majority of contracts placed during the period. The evolution of our SEND value proposition continued during the year with the transition from a pure software licensing model to a combined offering with the addition of technology- enabled out-sourced services assignments. We secured During the year, senior management time and resources were diverted into addressing the challenges with the Instem Clinical business and this is continuing. Whilst some challenges still remain, we have reappraised this business and believe that with some additional investment under the newly appointed Instem Clinical management team it can become a long-term cornerstone business for the Group. The strategic opportunities for 2017 and beyond remain encouraging; particularly as the period will see full-year contributions from the recent Notocord and Samarind acquisitions. The period will continue to require us to make further investment to support the continued strong performances from our business units, in particular the opportunity in SEND, although this is expected to pay back relatively quickly. As Chairman, it has always been my passion to invest in world leading global products. Today the Company has, for our markets, an unrivalled portfolio of such products. Finally, I would like to take this opportunity once again to thank all of our staff, customers and partners for their ongoing support. D Gare Non-Executive Chairman Instem plc Annual Report, 2016 5 continued growth “Taking further market share in the now FDA mandated SEND market has been a particular management focus, whilst also concentrating on improving our substantial recurring revenues, with a 21% increase year-on-year.” t r o p e r 6 Instem plc Annual Report, 2016 Strategic Report Chief Executive’s Statement Overview The past year was an extremely busy time for Instem, with the successful oversubscribed placing at the beginning of the year and the completion of two acquisitions, which are integrating well. With the exception of Instem Clinical, trading was robust throughout the year, helped by a buoyant preclinical market. Unfortunately, in what turned out to be a very challenging early phase clinical market, certain significant contracts at Instem Clinical were delayed and the outperformance across the rest of the Group’s operations was insufficient to compensate for this shortfall. We consequently downgraded expectations for the full year towards the end of the period. Highlights for the period included further market penetration for existing product suites and services and a continued high percentage of client retention. This was supported by cross-selling of products across our extended client base, particularly for our genetic toxicology solutions in major accounts and for all solutions in the Asia-Pacific regions. Through investment in product development, we have introduced new and chargeable solutions and expanded our service offering, leveraging our leading technology solutions. Taking further market share in the now FDA mandated SEND market has been a particular management focus, while also concentrating on improving our substantial recurring revenues, with a 21% increase year-on-year. The Group has continued to expand its customer base and has in excess of 500 customers (2015: in excess of 450 customers) for continuing products. Further information in respect of the Group performance and key performance indicators is disclosed in the Financial Review and Directors’ Report on pages 11 to 12 and 18 to 19 respectively. A significant positive milestone achieved during the period was the successful launch of “Instem University”, an online learning platform for the Group’s global customer base. The Instem University is a sophisticated, easy to use, intuitive web-based solution that is available on demand whenever a client needs it. Instem’s entire approach for the initiative is based upon the single objective of making it easier for clients to use all of Instem’s software so that end users can better perform their jobs. The introduction of Instem University and its dedicated Academies provides a highly cost effective and scalable solution enabling many clients to quickly and concurrently deploy major Instem product upgrades. Having clients on the latest product versions maximises the potential for add-on sales of new modules and reduces internal support costs. In order to support the growth of the Group, primarily related to SEND, KnowledgeScan and Instem University, we are intending to invest c.£1.0m in 2017, of which approximately £0.4m relates to third party cost of sales. This investment will include the funding of larger premises in Pune, India and further expansion of our software development, market facing and out-sourced services staff. Instem Preclinical - Provantis, Notocord-HEM, Comet, AMES & Cyto Study Manager Provantis, the Group’s primary preclinical software suite, experienced high renewal rates during the period with new clients added in-line with management expectations. The largest of these renewals was with Charles River Laboratories (‘CRL’), post their acquisition of WIL Research (‘WIL’), both significant Instem clients. The new agreement, which was announced in August 2016, included the continuation of all current licences, an extended support and maintenance contract running through to 31st December 2022 and the integration of two sizable Provantis implementation projects. The revised agreement resulted in moderately higher revenue in 2016 than under the previous separate agreements with WIL and CRL, and we believe there are further opportunities to continue to grow this key relationship over the coming years. Instem plc Annual Report, 2016 7 STRATEGIC REPORT One of the key Preclinical milestones for the year was the successful launch of the “Provantis 10 Software suite”, a fully integrated Windows-based system for organisations engaged in non-clinical evaluation studies, which went live in the second half of 2016. Initial feedback has been universally positive and we intend to further roll-out Provantis 10 across our customers during the coming year. As a consequence of the Perceptive Instruments (“Perceptive”) acquisition, Instem is one of the leading specialist video imaging system providers in the preclinical market and enjoyed a particularly strong year with revenue up approximately 46% over the prior year. Cyto Study Manager and AMES Study Manager enjoyed particularly strong trading periods. Cyto Study Manager, which integrates data acquisition, auditing, reporting and study management for several genetic toxicology assays into a single system, benefitted from adding support for Chromosome Aberration assays. Genotoxicity studies are mandatory for all pharmaceuticals, medical devices, agrochemicals and industrial chemicals with the AMES assay the most widely used regulatory test. Instem’s AMES Study Manager can be found in laboratories across the globe and has rapidly established itself with an excellent reputation for increasing productivity while improving compliance with GLP regulations and reporting requirements. Notocord, acquired by Instem in September 2016, continues to integrate well into the Group. Notocord is headquartered in Paris, France. The company provides software solutions for telemetry data acquisition and analysis and is a highly respected name in the life sciences software industry. Notocord has sold more than 1,500 licences around the world to major pharmaceutical companies, contract research laboratories, hospitals and academic research centres. Customers include Sanofi, Merck & Co and Pfizer. Whilst it is still too early to report on potential cross selling and upselling opportunities across the Group, there have already been high levels of interaction with both customers and potential new sales channel partners. This, coupled with a well-attended user meeting in Paris, provides us with confidence that the acquisition will perform at least in-line with management expectations in the current year. We are pleased to report that the order expanding the utilisation of Provantis at the US National Institute of Environmental Health Sciences (“NIEHS”), delayed from 2016, has recently been received and the appropriate accounting treatment for revenue and profit recognition purposes is currently being assessed. The delayed AMES and Cyto Study Manager order has also been received. Instem Clinical – ALPHADAS™ The early stage clinical market was undoubtedly the most challenging aspect of the year for Instem with little new business being procured during the period as much of the existing pipeline of new business was delayed. Whilst the deterioration in trading levels was initially identified in the first half of the year and flagged in the Interim Results, it was felt far more acutely during the second half. Following a Board review of the significant under performance of the Clinical business, the sale agreement with the former Logos Technologies shareholders was revised, resulting in a £700k reduction in the deferred consideration for the Logos acquisition. The two major Logos shareholders, who were the two senior managers for Instem Clinical, also left the company. Instem Clinical now has new management in place working to a revised, more conservative business plan. Whilst the business underperformed in the period, having undertaken a strategic reappraisal of Instem Clinical, we still strongly believe that the early stage clinical market represents a significant and attractive opportunity for the Group, including the potential for the cross selling of other products and services. However, we also recognise that it will take a period of time for the new management team to fully address certain issues and further staff investment of circa £0.25 million is being made into strengthening the technical and development capability in order to further enhance the ALPHADAS offering. Encouragingly, whilst still early in the year, we are seeing revenue growth compared to the prior period. Instem Scientific Instem Scientific delivered a record 14 KnowledgeScan Target Safety Assessment assignments during the period and is on target to deliver a further six for mid-sized pharmaceutical companies in the first few months of 2017. An important key performance indicator during the period was that all customers in 2016 have already placed repeat KnowledgeScan orders, which highlights the high value proposition this business offers. Whilst activity has been at record levels, the business has also been focussing on improving the workflow of discrete assignments to reduce delivery timelines, add extra capacity and expand operating margins. There is a growing pipeline of new business opportunities for 2017. Samarind Ltd Samarind, acquired in May 2016, provides Regulatory Information Management (“RIM”) software solutions across the life sciences sector, through its product suite “Samarind RMS”. Its solutions significantly enhance the quality of regulatory information and help to achieve and maintain compliance for pharmaceutical, biotech and medical device products. Samarind RMS delivers the security, flexibility and ease of use that regulatory affairs teams need to achieve their regulatory and commercial requirements. Deployed on-site or accessed on-line, Samarind’s solutions 8 Instem plc Annual Report, 2016 STRATEGIC REPORT provide a smarter way to manage the acquisition and maintenance of product licences. Instem can report that whilst it has been a slower year for revenue growth, the retention rate of existing clients has been high and we have released a new dashboard and analytics module to improve the user interface and strengthen customer relationships across the product suite. There has also been a strong focus on the new Identification and Description of Medicinal Product (“IDMP”) Standards, making sure Instem’s strategy is aligned with the expected regulatory dates and working with clients to plan for their IDMP implementations. Instem’s leadership in the xEVMPD standard that will be replaced remains a useful market differentiator as organisations consider their IDMP needs. Electronic Regulatory Submissions (SEND) – submit™ The FDA’s (“Food and Drug Administration”) SEND (“Standard for Exchange of Nonclinical Data”) initiative was ratified in December 2014 and mandated for an initial subset of study submissions in December 2016. Consequently, its implementation is now a market imperative for the entire drug development industry. A more comprehensive range of study submissions will be mandated by the FDA in December 2017, which has already started to influence purchases of Instem technology and services. Instem has continued to secure the majority of the SEND-related product and service business placed globally during 2016, winning over 50 contracts for its software solutions, of which 30 were for technology- enabled out-sourced services. Customers range across all sizes of pharmaceutical and contract research organisations with the largest contract award from a top 10 global pharmaceutical company, which purchased Instem’s entire submit™ solution suite. In the second half of 2016, Instem agreed an exclusive global distribution agreement for a third party product, SEND Explorer, which provides sophisticated visualisation and analytics for SEND data sets and nicely complements Instem’s other SEND solutions. Technology enabled out-sourced service volume increased during H2 2016 with 30 contracts secured during the year from companies that had not already equipped themselves with staff and technology to create and review SEND data sets internally. This trend is expected to continue and increase, so we are intending to recruit approximately 15 further specialists in this area, based predominantly in our Pune, India office, complementing the highly experienced staff already in place in the UK and North America. Market Overview Citeline®, which claims to have the world’s most comprehensive source of real-time R&D intelligence for the pharmaceutical industry, recently reported, in its Pharma R&D Annual Review 2017, that the global drug pipeline had increased by 8.4% in the past year with an additional 1,154 drugs added to the pipeline, the second highest rise over the last 10 years following the record rise in the prior year (1,418 were added in 2015- 16). As of January 2017, the total number of companies with one or more drugs in the regulatory stages of development has now risen to 4,003, an increase of 8.6% on the previous year. This is lower than the 2015-16 number but is still a “strikingly large growth rate”. The volume of activity in pharma R&D is at an all-time high with all the important parameters for Instem increasing strongly. The greatest growth occurred at the preclinical stage with an extra 632 drugs joining the early drug phase, an increase of 9.2% on the previous year. While there were increases in the numbers of drugs at every clinical phase, Phase I saw the greatest rise this year with the drug count increasing by 11.2%. Summary and Outlook With the exception of the disappointing performance of Instem Clinical, business in 2016 was strong, helped by a buoyant pre-clinical market, the target for the majority of our products and services. Revenues grew both organically and through the acquisitions of Samarind and Notocord. Recurring revenue and SaaS revenue growth of 21% and 38%, respectively, were particularly pleasing. A more conservative revenue outlook for Instem Clinical in 2017 is expected to be more than offset by the growing momentum of our KnowledgeScan big data analytics and insights service, introduced in 2016, and the full year contributions from the Samarind and Notocord acquisitions. The FDA mandate of SEND in December 2016 fuelled market demand for our software and technology enabled out-sourced services and we anticipate strong revenue growth in line with expectations, however we will continue to invest in additional staff and facilities in this area during 2017 to ensure we maximise market share and retain our substantial market leadership as the FDA regulations drive further market growth. While near term profit will be significantly reduced by this and other investment across the Group, we are putting in place a platform for further growth in the longer term. P J Reason Chief Executive 12 April 2017 Instem plc Annual Report, 2016 9 outlook “We are putting in place a platform for further growth in the longer term.“ i w e v e r 10 Instem plc Annual Report, 2016 Financial Review Instem’s revenue model consists of perpetual licence income with annual support contracts, professional services fees, SaaS subscriptions with annual support contracts and funded development initiatives. Total revenue for the year to 31 December 2016 increased by 12% to £18.3m (2015: £16.3m). This increase includes revenues from our new acquisitions of £1.1m combined with organic growth in respect of the majority of our products, and the benefit of average exchange rates, which increase the underlying revenues. These are offset by costs of our overseas subsidiaries. A key performance indicator of the Group is recurring revenue. During the year, the total recurring revenue, from support & maintenance contracts, SaaS based subscriptions and certain professional services increased 21% during the year to £12.1m (2015: £10.0m), representing 66% of total revenue (2015: 61%). This includes recurring revenue generated from our 2016 acquisitions of £0.8m. Earnings before interest, tax, depreciation and amortisation and non-recurring items for the year was £1.3m (2015: £2.5m). This decrease reflected a disappointing performance from Instem Clinical. The Group continued to invest in our sales and operations teams and infrastructure to capitalise on growth opportunities going forward. Adjusted profit before tax (i.e. adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance costs, non-recurring items and amortisation of intangibles on acquisitions) was £0.7m (2015: £1.7m). The unadjusted profit before tax for the year was £0.02m (2015: loss of £0.4m). The non-recurring items in the year included the costs of professional fees in respect of the acquisitions of Samarind and Notocord together with the restructuring costs in respect of Instem Clinical. These costs aggregated to £0.4m. The non-recurring items also included income of £1.0m in respect of the amendment and change in the deferred consideration and deferred contingent consideration in respect of Clinical (£0.7m) and Samarind (£0.3m), respectively. Development costs incurred during the year were £2.6m (2015: £1.9m), of which £0.8m (2015: £0.6m) was capitalised. The Group claimed and received research and development tax credits during the year of £0.4m (2015: £0.2m). Basic and fully diluted earnings per share calculated on an adjusted basis were 11.5p and 11.2p respectively (2015: 13.3p basic and 12.9p adjusted). The Group continued to generate net cash from operating activities. The Group had net cash reserves of £4.2m at 31 December 2016, compared with £2.2m as at 31 December 2015. The increase is largely due to the cash proceeds from the share issue during the year which generated £4.8m (net of fees) less the initial consideration for both Samarind and Notocord of £3.3m. The Group’s legacy defined benefit pension scheme has remained closed to new members since 2000 and to future accrual since 2008. It experienced an increase in the funding deficit during the year calculated in accordance with the provisions of IAS19 that amounted to £1.0m (net of deferred tax) (2015: £0.3m) due to a reduction in bond yields following the EU Referendum. This is a non-cash charge and was recognised in Other Comprehensive Income/(Expense). The overall deficit at the year-end stood at £4.7m (2015: £3.9m), represented by the fair value of assets of £9.7m (2015: £7.9m) and the present value of funded obligations of £14.4m (2015: £11.8m). As part of the scheme’s triennial actuarial valuation as at 5 April 2014, the Group agreed in June 2015 a schedule of payments to the scheme Instem plc Annual Report, 2016 11 FINANCIAL REVIEW designed to eliminate the funding deficit by November 2023. The next triennial valuation will be calculated as at 5 April 2017. Principal Risks and Uncertainties The directors consider that the global pharmaceutical market is likely to continue to provide growth opportunities for the business. The combination of the high level of annual support renewals and low levels of customer attrition provides revenue visibility to underpin the Group strategy on product and market development. The Group seeks to mitigate exposure to all forms of risk through a combination of regular performance review and a comprehensive insurance programme. The global nature of the market means that the Group is exposed to currency risk as a consequence of a significant proportion of its revenue being earned in US Dollars, some of which is mitigated by operating costs incurred by its US operation. The Group continually assesses the most appropriate approach to managing its currency exposure in line with the overall goal of achieving predictable earnings growth. The Group’s credit risk is primarily attributable to its trade receivables and the Group has policies in place to ensure that sales of products and services are made to customers with appropriate creditworthiness. The Group manages liquidity risk through regular cash flow forecasting and monitoring of cash flows, management review and regular review of working capital and costs. The Group regularly monitors its available headroom under its borrowing facilities. At 31 December 2016, its £2.0m committed bank facility was undrawn (2015: £2.0m undrawn). N J Goldsmith Chief Financial Officer 12 Instem plc Annual Report, 2016 BOARD OF DIRECTORS David Gare Non-executive Chairman David was a founder member of the Company’s former parent, Instem Limited, and led the resulting businesses through most of their history. David successfully achieved a succession of strategic developments for Instem Limited, including its sale to Kratos Inc. in 1976, its MBO in 1983, its flotation on the USM in 1984, its flotation on the Official List in 1996, its public to private and demerger in 1998 and the buyout of Instem LSS Limited from Alchemy Partners in 2002. Throughout, David has concentrated on value creation through achievement of a strong market position. Phil Reason Chief Executive Officer Phil is an experienced chief executive who has developed a number of IT businesses in the life sciences and nuclear industries, both organically and through acquisition. Phil joined the former parent Company, Instem Limited, in 1982 and was appointed Managing Director of the Life Sciences division in 1995 and Chief Executive Officer of Instem LSS Limited on the demerger from Instem Limited. Given the importance of the North American market to Instem’s organic and acquisitive growth, Phil relocated from the UK to the US in 2003 and established a new headquarters in the Philadelphia area. Phil previously ran Instem Limited’s Nuclear and Laboratory Information Management Systems integration businesses. Nigel Goldsmith Chief Financial Officer Nigel, who joined Instem in November 2011, has a wealth of experience in senior financial roles, at both public and private companies within the pharmaceutical industry. After qualifying as a Chartered Accountant, Nigel spent over nine years at KPMG prior to moving into industry. Nigel was Finance Director for three years at AIM listed, pharmaceutical and medical company, IS Pharma plc. He also spent a seven- year tenure as CFO at Almedica International Inc, a privately held supplier of clinical trial materials to the pharmaceutical and biotech industry in Europe and the US and two years as European Controller for the sales and marketing division of laboratory equipment manufacturer, Life Sciences International plc. Mike McGoun Non-executive Director Mike has a wealth of management experience within the IT industry. He spent 10 years at IBM prior to co-founding a successful ComputerLand franchise in 1984. In 1994, Mike moved to SkillsGroup plc as a main board director, with responsibility for corporate development and later as a non-executive director. Mike was founder and non-executive Chairman of Tikit Group plc prior to its disposal to BT plc in 2012. David Sherwin Non-executive Director David is a qualified Management Accountant and holds an MBA from Staffordshire University. He joined Instem Limited as a trainee accountant in 1973 and was appointed Chief Financial Officer in 1979. He has worked closely with David Gare on all of the subsequent transactions involving Instem Limited and Instem LSS Limited including participating in the management buyout of Instem Limited in 1983, the flotation on the USM in 1984, the flotation on the Official List in 1996 and the demerger of the business in 1998. Instem plc Annual Report, 2016 13 s t r o p e r 14 Instem plc Annual Report, 2016 CORPORATE GOVERNANCE STATEMENT CORPORATE GOVERNANCE STATEMENT Given the size of the Group, the Board has decided to follow the Corporate Governance Code for Small and Mid-Size Quoted Companies as a framework as it seeks to maintain a strong governance ethos throughout the Group. The Board recognises its overall responsibility for the Group’s systems of internal control and for monitoring their effectiveness. The main features of the Group’s corporate governance procedures are as follows; a. b. c. d. the Board has one independent non-executive director who takes an active role in Board matters; the Group has an Audit Committee, a Remuneration Committee and a Nomination Committee, each of which consists of the non-executive directors, and meets regularly with executive directors in attendance by invitation. The Audit Committee has unrestricted access to the Group’s auditor and ensures that auditor independence has not been compromised; all business activity is organised within a defined structure with formal lines of responsibility and delegation of authority, including a schedule of “matters referred to the Board”; and regular monitoring of key performance indicators and financial results together with comparison of these against expectations. Attendance at Board and Committee Meetings Attendances of directors at Board and Committee meetings convened in the period, along with the number of meetings they were invited to attend, are set out below: Audit Committee The Audit Committee comprises M F McGoun (Chairman), D Gare and D M Sherwin, all of whom are non-executive directors of the Company. The Board is satisfied that the Audit Committee has all the recent and relevant financial experience required to fulfil the role. Appointments to the Audit Committee are made by the Board in consultation with the Nomination Committee and the chairman of the Audit Committee. The Audit Committee meets at least twice a year and any other time as required by either the chairman of the Audit Committee, the Chief Financial Officer of the Group or the external auditor of the Group. In addition, the Audit Committee shall meet with the external auditor of the Group (without any of the executives attending) at any time during the year as it deems fit. c. The Audit Committee: a. monitors the financial reporting and internal financial control principles of the Group; b. maintains appropriate relationships with the external auditor including considering the appointment and remuneration of the external auditor and reviews and monitors the external auditor’s independence and objectivity and the effectiveness of the audit process; reviews all financial results of the Group and financial statements, including all announcements in respect thereof before submission of the relevant documents to the Board; reviews and discusses (where necessary) any issues and recommendations of the external auditor including reviewing the external auditor’s management letter and management’s response; considers all major findings of internal operational audit reviews and management’s response to ensure co-ordination between internal and external auditor; reviews the Board’s statement on internal reporting systems and keeps the effectiveness of such systems under review; and considers all other relevant findings and audit programmes of the Group. d. e. g. f. No. of meetings attended / No. of meetings invited to attend Board meetings Audit Committee Remuneration Committee Nomination Committee Executive directors P J Reason N J Goldsmith Non-Executive directors D Gare D M Sherwin M F McGoun 19/19 19/19 16/19 19/19 17/19 2/2 2/2 2/2 2/2 2/2 2/2 0/0 2/2 2/2 2/2 1/1 1/1 1/1 1/1 1/1 Instem plc Annual Report, 2016 15 CORPORATE GOVERNANCE STATEMENT Audit Committee (continued) The Audit Committee is authorised to: a. b. c. investigate any activity within its terms of reference; seek any information it requires from any employee of the Group; and obtain, at the Group’s expense, outside legal or other independent professional advice and to secure the attendance of such persons to meetings as it considers necessary and appropriate. e. considers and makes recommendations to the Board about the public disclosure of information about the executive directors’ remuneration packages and structures in addition to those required by law or by the London Stock Exchange. The Chairman of the Remuneration Committee reports formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities. The Remuneration Committee produces an annual report which is included in the Group’s annual report and accounts. Remuneration Committee The Remuneration Committee is authorised to: The Remuneration Committee comprises M F McGoun (Chairman), D Gare and D M Sherwin, all of whom are non-executive directors of the Company. The members of the Remuneration Committee are appointed by the Board on recommendation from the Nomination Committee, in consultation with the Chairman of the Remuneration Committee. The Chief Executive Officer of the Group is normally invited to meetings of the Remuneration Committee to discuss the performance of other executive directors but is not involved in any of the decisions. The Remuneration Committee invites any person it thinks appropriate to join the members of the Remuneration Committee at its meetings. The Remuneration Committee meets at least once a year and any other time as required by either the Chairman of the Remuneration Committee or the Chief Financial Officer of the Group. The Remuneration Committee: a. ensures that the executive directors are fairly rewarded for their individual contributions to the overall performance of the Group but also ensures that the Group avoids paying more than is necessary for this purpose; considers the remuneration packages of the executive directors and any recommendations made by the Chief Executive Officer for changes to their remuneration packages including in respect of bonuses (including associated performance criteria), other benefits, pension arrangements and other terms of their service contracts and any other matters relating to the remuneration of or terms of employment applicable to the executive directors that may be referred to the Remuneration Committee by the Board; oversees and reviews all aspects of the Group’s share option schemes including the selection of eligible directors and other employees and the terms of any options granted; b. c. d. demonstrates to the Group’s shareholders that the remuneration of the executive directors is set by an independent committee of the Board; and 16 Instem plc Annual Report, 2016 a. b. c. investigate any activity within its terms of reference; seek any information it requires from any employee of the Group; assess the remuneration paid by other UK listed companies of a similar size in any comparable industry sector and to assess whether changes to the executive directors’ remuneration is appropriate for the purpose of making their remuneration competitive or otherwise comparable with the remuneration paid by such companies; and d. obtain, at the Group’s expense, outside legal or other independent professional advice, including independent remuneration consultants, when the Remuneration Committee reasonably believes it is necessary to do so and secure the attendance of such persons to meetings as it considers necessary and appropriate. Nomination Committee The Nomination Committee comprises D Gare (Chairman), M F McGoun and D M Sherwin, all of whom are non-executive directors of the Company. Appointments to the Nomination Committee are made by the Board, in consultation with the Chairman of the Nomination Committee. The Nomination Committee may invite any person it thinks appropriate to join the members of the Nomination Committee at its meetings. The Nomination Committee: a. reviews the structure, size and composition (including skills, knowledge and experience) required of the Board compared to its current position and makes recommendations to the Board with regard to any changes; b. gives full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Group, and what skills and expertise are needed on the Board in the future; CORPORATE GOVERNANCE STATEMENT Nomination Committee (continued) c. is responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise; and d. evaluates the balance of skills, knowledge and experience on the Board before an appointment is made and, in light of this evaluation, prepares a description of the role and capabilities required for a particular appointment. The Chairman of the Nomination Committee reports formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities. The Nomination Committee also makes recommendations to the Board concerning: a. formulating plans for succession for both executive and non-executive directors and in particular the key roles of Chairman of the Board and Chief Executive Officer; b. membership of the Audit and Remuneration c. d. Committees, in consultation with the chairmen of those committees; the re-appointment of any non-executive director at the conclusion of their specified term of office having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required; the re-election by shareholders of any director under the “retirement by rotation” provisions in the Company’s articles of association having due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required; e. matters relating to the continuation in office of any director at any time including the suspension or termination of service of an executive director as an employee of the Group subject to the provisions of the law and his/her service contract; and the appointment of any director to executive or other office other than to the positions of Chairman of the Board and Chief Executive Officer, the recommendation for which would be considered at a meeting of the full Board. f. d. instruct external professional advisors to attend any meeting at the Group’s expense if the Nomination Committee considers this reasonably necessary and appropriate. Internal Controls The directors are responsible for establishing and maintaining the Group’s system of internal control and reviewing its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss. The Board and senior executives meet to review both the risks facing the business and the controls established to minimise those risks and their effectiveness in operation on an ongoing basis. The aim of these reviews is to provide reasonable assurance that material risks and problems are identified and appropriate action taken at an early stage. Going Concern The directors have prepared and reviewed detailed projections which have been made for the 12 months following the approval of the financial statements. This work gives the directors confidence that the Group has adequate resources to enable it to continue in operation for the foreseeable future. The Group has positive cash reserves, as well as a committed working capital facility of £2.0m which at 31 December 2016 was undrawn. The Group has, therefore, sufficient liquid assets to cover its day-to-day needs, in addition to its operating cash flow generation. Accordingly the directors continue to adopt the going concern basis for the preparation of the financial statements. On behalf of the Board M F McGoun Independent Non-Executive Director The Nomination Committee is authorised to: a. investigate any activity within its terms of reference; seek any information it requires from any employee; obtain outside legal or other independent professional advice at the Group’s expense when the Nomination Committee reasonably believes it is necessary to do so; and b. c. Instem plc Annual Report, 2016 17 DIRECTORS’ REPORT DIRECTORS’ REPORT Future Developments The directors submit their report and the Group and Company financial statements of Instem plc for the year ended 31 December 2016. Instem plc is a public limited company, incorporated and domiciled in England, and quoted on AIM. Principal Activities Instem is a leading supplier of IT applications to the early development healthcare market, delivering compelling solutions for data collection, management and analysis across the R&D continuum. Instem applications are in use by customers worldwide, meeting the rapidly expanding needs of life science and healthcare organisations for data- driven decision making leading to safer, more effective products. 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. The directors consider that the continued investment in product and market development will allow the business to grow organically in its core markets. Investment in business growth initiatives will also allow the business to move into new product and market areas. The combination of organic growth along with strategic acquisitions will support the expected growth as outlined in the Chairman’s Statement and the Strategic Report. Research and Development Activities The Group continues its development programme of software for the global pharmaceutical market including the research and development of new products and enhancement to existing products. The directors consider the investment in research and development to be fundamental to the success of the business in the future. Dividends The directors do not recommend the payment of a dividend. Directors Review of the Business The following directors held office during the year: In measuring the successful development of the business, the directors focus on two important performance indicators which strongly underwrite the future performance of the Group: D Gare M F McGoun D M Sherwin P J Reason N J Goldsmith 1. Total number of customers In 2016 the Group had in excess of 500 customers (2015: in excess of 450 customers) for continuing products. Details of the directors’ service contracts and their respective notice terms are detailed in the Directors’ Remuneration report on pages 20 and 21. 2. Recurring revenue Directors and their Interests The Group generates a substantial proportion of revenue from fees in respect of annual support, hosting and routine upgrade services. The total recurring revenue increased 21% during the year to £12.1m (2015: £10.0m), representing 66% of total revenue (2015: 61%). This includes recurring revenue generated from the two 2016 corporate acquisitions of £0.8m. A more detailed review of the development and performance of the Group’s business during the year and its position at the end of the year is set out in the Chairman’s Statement, the Strategic Report and Financial Review on pages 5 to 12. The interests of the directors who held office at 31 December 2016 and up to the date of this report (2015: as at 26 April 2016) were as follows: 2016 2015 No. of Shares No. of Shares D Gare 1,418,427 1,418,427 D M Sherwin 1,380,066 1,380,066 P J Reason 665,287 665,287 M F McGoun 36,786 36,786 N J Goldsmith - - 18 Instem plc Annual Report, 2016 DIRECTORS’ REPORT Directors’ interests in share options are detailed in the Remuneration report on pages 20 and 21. Auditor Pursuant to s489 of the Companies Act 2006, a resolution to re-appoint RSM UK Audit LLP as auditor will be put to the members at the forthcoming Annual General Meeting. On behalf of the Board P J Reason Director 12 April 2017 Employee Involvement The general policy of the Group is to welcome employee involvement as far as it is reasonably practicable. Employees are kept informed of progress by regular company meetings and monthly management reports. Political Donations The Group made no political donations in 2016 or 2015. Financial Instruments The Group’s objectives and policies on financial instruments are set out in note 21 to the financial statements. Indemnity of Officers and Directors Under the Company’s Articles of Association and subject to the provisions of the Companies Act, the Group may and has indemnified all directors and other officers against liability incurred in the execution or discharge of their duties or the exercise of their powers, including but not limited to any liability for the costs of any legal proceedings. The Group has purchased and maintains appropriate insurance cover against legal action brought against directors or officers. Annual General Meeting The Annual General Meeting of the Company will be held on 18 May 2017 at the offices of RSM UK Audit LLP, 3 Hardman Street, Manchester, M3 3HF. The resolutions to be proposed at the Annual General Meeting, together with explanatory notes, appear in a separate notice of Annual General Meeting which is sent to all shareholders. A proxy card for registered shareholders is distributed along with the notice. Statement as to Disclosure of Information to Auditor The directors who were in office on the date of approval of these financial statements have confirmed, as far as they are aware, that there is no relevant audit information of which the auditor is unaware. Each of the directors has confirmed that they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Instem plc Annual Report, 2016 19 DIRECTORS’ REMUNERATION REPORT DIRECTORS’ REMUNERATION REPORT Performance Related Annual Bonus Instem plc is a company listed on AIM and it is not required to comply with Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 relating to directors’ remuneration reports or the Listing Rules. The disclosures contained within this report are, therefore, made on a voluntary basis and in keeping with the Board’s commitment to best practice. Remuneration Committee The Remuneration Committee (‘the Committee’) is composed entirely of non-executive directors. The Committee was formed upon the public listing of the Company on 13 October 2010. The Chairman of the Committee is M F McGoun. The terms of reference for the Committee are to determine the Group’s policy on executive remuneration and to consider and approve the remuneration packages for directors and key executives of the Group, subject to ratification by the Board. During the year, the Committee met on two occasions. Full details of the elements of each director’s remuneration are set out on the following page. Details of share- based payment are shown in note 7 to the financial statements. Executive directors are eligible for a performance related bonus based on Group performance, in particular, the achievement of profit targets. The performance related annual bonus forms a significant part of the level of remuneration considered appropriate by the Committee. In addition to the formal bonus scheme, the Committee has the discretion to recommend the payment of ad hoc awards to reflect exceptional performance. Bonuses amounting to £0.02m were payable to executive directors in respect of the year ended 31 December 2016 (2015: £0.03m). Pensions Company contributions are made to the executive directors’ personal pension schemes up to a maximum of 16.5% of basic salary. Benefits Benefits comprise car and fuel allowance, private healthcare and critical illness cover. No executive director receives additional remuneration or benefits in relation to being a director of the Board of the Company or any subsidiary of the Company. Policy on Executive Director Remuneration Service Contracts The Executive directors have contracts with notice periods between six and twelve months. The Board determines the Group’s policy on non-executive directors’ remuneration. D Gare, D M Sherwin and M F McGoun each have a letter of appointment that had an initial three year term commencing October 2010. These were renewed in December 2013, each with a notice period of three months. Since October 2013 M F McGoun has been remunerated through a service company, Noble Adamson Limited. The Group’s current and ongoing policy aims to ensure that executive directors are rewarded fairly for their individual contributions to the Group’s overall performance and is designed to attract, retain and motivate executives of the right calibre. The Committee is responsible for recommendations on all elements of executive remuneration including, in particular, basic salary, annual bonus, share options and any other incentive awards. In implementing the remuneration policy, the Committee has regard to factors specific to the Group, such as salary and other benefit arrangements within the Group and the achievement of the Group’s strategic objectives. The Committee determines the Group’s Policy on executive remuneration with reference to comparable companies of similar market capitalisation, location and business sector. Basic Salary The basic salaries of executive directors are reviewed annually having regard to individual performance and position within the Group and are intended to be competitive but fair using information provided from both internal and external sources. 20 Instem plc Annual Report, 2016 DIRECTORS’ REMUNERATION REPORT The emoluments paid to directors in the year ended 31 December 2016 were as follows: Salary £000 Bonus £000 Benefits £000 Pension £000 2016 Total £000 2015 Total £000 Executives P J Reason N J Goldsmith Non-executives D Gare D M Sherwin M F McGoun 194 103 52 30 30 Total 409 15 7 - - - 22 5 11 - - - 16 27 13 - - - 40 241 134 52 30 30 487 221 134 44 24 24 447 Directors’ and Employees’ Share Options Exercise price (£) Issue date Held at 31 Dec 2015 Granted during year Exercised during year Lapsed during year Held at 31 Dec 2016 P J Reason Ordinary shares 1.750 13/10/2010 187,427 0.900 0.100 14/01/2013 23,429 29/07/2015 150,000 N J Goldsmith Ordinary shares 2.215 29/11/2011 40,000 1.760 0.900 0.100 07/02/2012 20,000 14/01/2013 15,000 29/07/2015 100,000 Employees Ordinary shares 1.750 13/10/2010 304,568 03/03/2011 93,844 17/10/2011 14,667 23/10/2012 30,000 14/01/2013 61,397 11/02/2015 81,168 29/07/2015 215,000 21/11/2015 50,516 2.220 2.220 1.115 0.900 0.100 0.100 0.100 0.100 0.100 27/05/2016 19/09/2016 - - 34,558 70,000 - - - - - - - - - - - - - - - - - - - - - - (51,542) - - (8,500) (11,597) (40,584) - - 187,427 23,429 (37,500) 112,500 323,356 40,000 20,000 15,000 75,000 150,000 253,026 93,844 14,667 21,500 49,800 40,584 - - - (25,000) - - - - - - (3,750) (61,250) 150,000 (25,258) - - - - (17,500) 25,258 34,558 52,500 735,737 Total 1,387,016 104,558 (141,231) (141,250) 1,209,093 Approved by the Board and signed on its behalf by: M F McGoun Independent Non-Executive Director Instem plc Annual Report, 2016 21 DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Instem plc website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS The directors are responsible for preparing the Strategic Report and the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and Company financial statements for each financial year. The directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and have elected under Company law to prepare the Company financial statements in accordance with IFRS as adopted by the EU. The financial statements are required by law and IFRS adopted by the EU to present fairly the financial position of the Group and the Company and the financial performance of the Group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing the Group and Company financial statements, the directors are required to: a. select suitable accounting policies and then apply them consistently; b. make judgements and accounting estimates that c. are reasonable and prudent; state whether they have been prepared in accordance with IFRSs adopted by the EU; d. prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 22 Instem plc Annual Report, 2016 INDEPENDENT AUDITOR’S REPORT to the members Of instem plc INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INSTEM PLC Opinion on financial statements We have audited the group and parent company financial statements (“the financial statements”) on pages 24 to 70. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • the financial statements give a true and fair view of the state of the group’s and the parent’s affairs as at 31 December 2016 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • • Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at http://www.frc.org.uk/ auditscopeukprivate. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements and, based on the work undertaken in the course of our audit, the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • • • we have not received all the information and explanations we require for our audit. Respective responsibilities of directors and auditor As more fully explained in the Directors’ Responsibilities Statement set out on page 22, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Graham Bond FCA (Senior Statutory Auditor) For and on behalf of RSM UK AUDIT LLP Statutory Auditor 14th Floor Chapel Street Liverpool L3 9AG 12 April 2017 Instem plc Annual Report, 2016 23 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2016 CONTINUING OPERATIONS Note Year ended 31 December 2016 £000 Year ended 31 December 2015 £000 1 2 2 3 4 5 9 REVENUE Operating expenses Share based payment EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS (‘EBITDA’) Depreciation Amortisation of intangibles arising on acquisition Amortisation of internally generated intangibles PROFIT BEFORE NON-RECURRING INCOME/(COSTS) Non-recurring income/(costs) PROFIT /(LOSS) AFTER NON-RECURRING INCOME/(COSTS) AND BEFORE FINANCE COSTS Finance income Finance costs PROFIT/(LOSS) BEFORE TAXATION Taxation PROFIT/(LOSS) FOR THE YEAR OTHER COMPREHENSIVE EXPENSE Items that will not be reclassified to profit and loss account Actuarial loss on retirement benefit obligations Deferred tax on actuarial loss Items that may be reclassified to profit and loss account Exchange differences on translating foreign operations OTHER COMPREHENSIVE EXPENSE FOR THE YEAR TOTAL COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY TOTAL COMPREHENSIVE INCOME/(EXPENSE) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY Earnings per share from continuing operations attributable to owners of the parent company: Basic Diluted 25 25 18,319 (16,843) (223) 1,253 (156) (667) (380) 50 619 669 - (646) 23 1,035 1,058 (1,192) 215 (977) 844 (133) 925 1,058 925 6.9p 6.8p 16,321 (13,553) (263) 2,505 (156) (640) (376) 1,333 (1,426) (93) 4 (272) (361) (67) (428) (339) 61 (278) (24) (302) (730) (428) (730) (3.5p) (3.5p) 24 Instem plc Annual Report, 2016 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2016 Note £000 £000 £000 £000 2016 2015 ASSETS NON-CURRENT ASSETS Intangible assets Property, plant and equipment Deferred tax assets TOTAL NON-CURRENT ASSETS CURRENT ASSETS Inventories Trade and other receivables Financial asset Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Deferred income Current tax payable Financial liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Financial liabilities Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES EQUITY Share capital Share premium Merger reserve Shares to be issued Translation reserve Retained earnings 11 13 22 14 15 16 17 18 19 20 20 23 24 26 26 26 26 26 TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT TOTAL EQUITY AND LIABILITIES 17,607 374 947 916 6,899 10 4,189 2,670 9,092 429 979 242 4,746 1,577 12,462 1,432 864 1,048 (4,599) 12,035 376 663 18,928 13,074 822 4,745 - 2,183 1,797 7,107 541 385 448 3,933 1,304 7,903 1,241 641 204 (4,680) 7,750 20,824 9,830 4,381 14,211 6,613 20,824 12,014 30,942 13,170 4,988 18,158 12,784 30,942 The financial statements on pages 24 to 70 were approved by the board of directors and authorised for issue on 12 April 2017 and are signed on its behalf by: P J Reason Director N J Goldsmith Director Instem plc Annual Report, 2016 25 COMPANY STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2016 Note 2016 2015 ASSETS £000 £000 £000 £000 NON-CURRENT ASSETS Investments 12 28,426 23,395 TOTAL NON-CURRENT ASSETS 28,426 23,395 CURRENT ASSETS Trade and other receivables Financial asset Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Financial liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES 15 16 17 18 20 2,301 10 2,221 4,332 950 4,532 32,958 2,621 - 24 3,824 357 2,645 26,040 5,282 4,181 Financial liabilities 20 158 331 TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES EQUITY Share capital Share premium Merger reserve Shares to be issued Retained earnings 24 26 26 26 26 1,577 12,462 13,066 864 (451) 158 5,440 331 4,512 1,304 7,903 12,875 641 (1,195) TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT TOTAL EQUITY AND LIABILITIES 27,518 32,958 21,528 26,040 The Company’s profit for the year and total comprehensive income for the year was £744,000 (2015:loss £1,350,000). The financial statements on pages 24 to 70 were approved by the board of directors and authorised for issue on 12 April 2017 and are signed on its behalf by: P J Reason Director N J Goldsmith Director 26 Instem plc Annual Report, 2016 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2016 2016 2015 Note £000 £000 £000 £000 CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before taxation 23 Adjustments for: Depreciation Loss on disposal of property, plant and equipment Amortisation of intangibles Share based payment Retirement benefit obligations Finance income Finance costs 156 2 1,047 223 (518) - 646 (Decrease)/increase in deferred contingent consideration (1,017) CASH FLOWS FROM OPERATIONS BEFORE MOVEMENTS IN (361) 156 - 1,016 263 (427) (4) 272 1,361 562 2,276 WORKING CAPITAL Movements in working capital: Decrease/(increase) in inventories Increase in trade and other receivables Increase in trade, other payables and deferred income CASH GENERATED FROM OPERATIONS Finance costs Income taxes NET CASH GENERATED FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Finance income received Purchase of intangible assets Purchase of property, plant and equipment Payment of deferred contingent consideration Repayment of capital of finance leases 85 647 (520) 127 12 (1,737) 1,810 (379) (141) - (890) (113) - (33) Purchase of subsidiary undertakings (net of cash acquired) (2,347) NET CASH USED IN INVESTING ACTIVITIES (3,383) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital Loan notes repaid Finance lease interest 4,823 - (8) NET CASH GENERATED FROM/(USED IN) FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at start of year Effects of exchange rate changes on the balance of cash held in foreign currencies CASH AND CASH EQUIVALENTS AT END OF YEAR 17 4,815 1,559 2,183 447 4,189 (313) (71) 493 (86) 205 4 (612) (113) (950) (8) - 12 (303) (4) 109 2,385 119 2,504 (1,679) (295) 530 1,676 (23) 2,183 Instem plc Annual Report, 2016 27 COMPANY STATEMENT OF CASH FLOWS for the year ended 31 December 2016 Note £000 £000 £000 £000 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before taxation Adjustments for: Finance income Finance cost (Decrease)/increase in deferred contingent consideration CASH FLOWS (USED IN)/FROM OPERATIONS BEFORE MOVEMENTS IN WORKING CAPITAL Movements in working capital: Decrease/(increase) in trade and other receivables Increase in trade and other payables NET CASH GENERATED FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Finance income received Purchase of subsidiary undertakings Payment of deferred contingent consideration NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital Loan notes repaid NET CASH GENERATED FROM/(USED IN) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at start of year CASH AND CASH EQUIVALENTS AT END OF YEAR 17 744 (18) 129 (1,017) 9 (3,289) - 4,823 - (162) 320 496 654 (3,280) 4,823 2,197 24 2,221 (1,350) (5) 41 1,361 5 - (950) 12 (303) 47 (390) 1,506 1,163 (945) (291) (73) 97 24 28 Instem plc Annual Report, 2016 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY Shares to Translation Retained be issued reserve earnings £000 £000 Share capital £000 Balance as at 1 January 2015 1,221 Loss for the year Other comprehensive expense for the year Total comprehensive expense Shares issued Share based payment - - - 83 - Share premium £000 7,892 - - - 11 - Merger reserve £000 (326) - - - 1,567 - Balance at 31 December 2015 1,304 7,903 1,241 Profit for the year Other comprehensive income/ (expense) for the year Total comprehensive income Shares issued Share based payment - - - 273 - - - - 4,559 - - - - 191 - Balance as at 31 December 2016 1,577 12,462 1,432 £000 378 - - - - 263 641 - - - - 223 864 Total equity £000 5,419 (428) (302) (730) 1,661 263 6,613 1,058 (3,974) (428) (278) (706) - - (4,680) 1,058 (977) (133) 81 - - 925 5,023 223 1,048 (4,599) 12,784 228 - (24) (24) - - 204 - 844 844 - - Shares to be issued Retained earnings COMPANY STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY Share capital £000 Balance as at 1 January 2015 1,221 Loss for the year Shares issued Share based payment - 83 - Share premium £000 7,892 - 11 - Merger reserve £000 11,308 - 1,567 - Balance as at 31 December 2015 1,304 7,903 12,875 Profit for the year Shares issued Share based payment - 273 - - 4,559 - - 191 - Balance as at 31 December 2016 1,577 12,462 13,066 £000 378 - - 263 641 - - 223 864 Total equity £000 20,954 (1,350) 1,661 263 £000 155 (1,350) - - (1,195) 21,528 744 - - 744 5,023 223 (451) 27,518 Instem plc Annual Report, 2016 29 accounting policies GENERAL INFORMATION The principal activity and nature of operations of the Group is the provision of world class IT solutions to the early development healthcare market. Instem’s solutions for data collection, management and analysis are used by customers worldwide, to meet the needs of life science and healthcare organisations for data-driven decision making leading to safer, more effective products. Instem plc is a public limited company, listed on AIM, and incorporated in England and Wales under the Companies Act 2006 and domiciled in England and Wales. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD. STATEMENT OF COMPLIANCE The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretation Committee (IFRIC) interpretations as adopted by the EU and the requirements of the Companies Act 2006 applicable to companies reporting under IFRS. BASIS OF PREPARATION The Group’s accounting reference date is 31 December. The financial statements have been prepared on the historical cost basis. The Company has taken advantage of the audit exemption for three of its non-trading subsidiaries Instem Life Science Systems Limited (company number 04339129), Instem Scientific Solutions Limited (company number 03598020) and Logos Technologies Limited (company number 05836842), by virtue of s479A of Companies Act 2006. The Company has provided parent guarantees to these three subsidiaries which have taken advantage of the exemption from audit. Under this guarantee, the Company has a contingent liability of £9.0m. In accordance with Section 408 of the Companies Act 2006 the Company has elected not to present its own income statement. The profit for the year of the parent company is £0.74m (2015: loss of £1.35m). The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in these consolidated financial statements. BASIS OF CONSOLIDATION The consolidated financial statements incorporate those of the parent company, Instem plc, and its subsidiary undertakings made up to 31 December 2016 and 31 December 2015. In preparing the consolidated financial statements, any intra- group balances, unrealised gains and losses or income and expenses arising from intra-group trading are eliminated. Where accounting policies used in individual financial statements of a subsidiary company differ from Group policies, adjustments are made to bring these policies in line with Group policies. Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain economic benefits from their activities. Subsidiaries are consolidated from the date on which control is transferred to the Group up until the date that control ceases. 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’. Contingent consideration is measured at its acquisition-date fair value and is included as part of the consideration transferred. 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. 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 profit or loss. Contingent consideration is recognised initially at fair value and subsequently carried at amortised cost; the difference between the gross amount and the fair value is recognised in the income statement over the period in which the liability is settled using the effective interest method. 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. Detailed projections have been made for the 12 months following the approval of the financial statements and sensitivity analysis undertaken. This work gives the directors confidence that the Group has adequate resources to enable it to continue in operation for the foreseeable future. The Group has a significant proportion of recurring revenue from a well-established global customer base, supported by a largely fixed cost base. A committed working capital facility is in place to support the Group’s working capital needs. The Group had net current assets (excluding deferred income) of £7.9m at 31 December 2016 (2015: £5.0m). The deferred income recurs each year on renewal of contracts, and in general the Group has either received the cash or has raised invoices for the services. The Group has positive cash reserves, as well as a committed working capital facility of £2.0m referred to above which, at 31 December 2016 was undrawn. Accordingly the directors continue to adopt the going concern basis for the preparation of the financial statements. REVENUE RECOGNITION The Group follows the principles of IAS 18 ‘Revenue Recognition’, in determining appropriate revenue recognition principles. In general, revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue comprises the value of software licence sales, SaaS subscription, installation, training, and maintenance and support services. Revenue is recognised when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed and determinable and (iv) collectability is reasonably assured. 30 Instem plc Annual Report, 2016 accounting policies For software arrangements with multiple elements revenue is recognised dependent on whether vendor-specific objective evidence (‘VSOE’) of fair value exists for each of the elements. VSOE is determined by reference to sales made to customers on a stand-alone basis. Where there is no VSOE revenue is recognised over the full term of each contract. Revenue from licence based products is recognised when the risks and rewards of ownership of the product are transferred to the customer i.e. when licence keys are delivered to the customer, the sales price is fixed and determinable and collectability is reasonably assured. Revenue from software maintenance, SaaS and other time based contracts is recognised over the invoiced contract period. Revenue from installation and training is recognised on a percentage completion basis on fixed price contracts or as services are provided in respect of time and materials contracts. The excess of amounts invoiced over revenue is included in deferred income. If the amount of revenue recognised exceeds the amounts invoiced the excess amount is included within amounts recoverable on contracts. EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS (‘EBITDA’) Earnings before interest, taxation, depreciation, amortisation and non-recurring items (EBITDA) is profit/(loss) arising from the Group’s normal trading activities stated before depreciation, amortisation, non-recurring items, finance income and finance costs, and shown in this way to provide a clearer measure of underlying operating performance. SEGMENTAL REPORTING IFRS 8 ‘Operating Segments’ requires segmental information for the Group on the basis of information reported internally to the chief operating decision-maker for decision-making purposes. The Group considers that the role of chief operating decision- maker is performed by the Group’s Board of Directors. Since the Group is primarily providing goods and services to the global life sciences market there is only one operating segment which is monitored by the business. FOREIGN CURRENCIES Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the date the fair value was determined. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates ruling at the reporting date. The revenue and expenses of foreign operations are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the dates of the transactions, or otherwise at the exchange rate ruling at the date of each transaction. Exchange differences arising from the translation of foreign operations are taken directly to the translation reserve. They are released into profit or loss upon disposal of the foreign operation. The presentational currency adopted by the Group is Sterling (GBP). The functional currencies of each of the companies in the Group are as follows: Instem plc Sterling (GBP) Instem Life Science Systems Limited Sterling (GBP) Instem LSS Limited Sterling (GBP) Instem LSS (North America) Limited US Dollars (USD) Instem LSS Asia Limited Hong Kong Dollars (HKD) Instem Information Systems (Shanghai) Limited Renminbi (RMB) Instem Scientific Limited Sterling (GBP) Instem Scientific Solutions Limited Sterling (GBP) Instem Scientific Inc US Dollars (USD) Instem India Pvt Limited Indian Rupees (INR) Instem Clinical Holdings Limited Sterling (GBP) Instem Clinical Limited Sterling (GBP) Instem Clinical Inc US Dollars (USD) Logos Technologies Limited Sterling (GBP) Perceptive Instruments Limited Sterling (GBP) Instem Japan K.K Japanese Yen (JPY) Samarind Limited Sterling (GBP) Notocord Systems S.A. Euro (EUR) Notocord Inc. US Dollars (USD) FINANCE INCOME Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Finance income includes exchange gains (including exchange gains on the translation of intra-group funding balances). FINANCE COSTS Net finance costs include interest payable, exchange losses (including exchange losses on the translation of inter-company funding balances), unwinding discount from future deferred consideration payments, finance charges on finance leases and net interest on pension scheme liabilities. Interest payable is recognised in the statement of comprehensive income as it accrues, using the effective interest method. LEASING Where assets are financed by leasing agreements that give rights approximating to ownership (“finance leases”), the assets are treated as if they had been purchased outright. The amount capitalised is the fair value or, if lower, the present value of the minimum lease payments payable during the lease term. The corresponding leasing commitments are shown as finance lease obligations to the lessor. Instem plc Annual Report, 2016 31 accounting policies The exchange rates used to translate the financial statements into Sterling (GBP) are as follows: US Dollar (USD) Hong Kong Dollar (HKD) Average rate for year ended 31 December 2015 1.5283 11.8503 Closing rate at 31 December 2015 1.4941 11.5809 Average rate for year ended 31 December 2016 1.3553 10.5210 Closing rate at 31 December 2016 1.2340 9.5654 Chinese Renminbi (RMB) 9.5010 9.6767 9.0102 8.5978 Indian Rupee (INR) Japanese Yen (JPY) Euro (EUR) 97.8763 179.712 98.9288 185.080 91.0666 147.577 83.4892 144.503 - - 1.2242 1.1731 Lease payments are apportioned between finance charges and reduction of lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to finance costs in the statement of comprehensive income. All other leases are “operating leases” and the annual rentals are charged to the statement of comprehensive income on a straight line basis over the lease term. SHARE BASED PAYMENT TRANSACTIONS The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant by reference to the fair value of the equity instruments granted. The fair value determined at the grant date of equity-settled share- based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of instruments that will eventually vest with a corresponding adjustment to equity. Fair values are measured by use of the Binomial, Monte Carlo or Black Scholes models. The expected life used in the model has been adjusted, based on management’s best estimate, for the effect of non-transferability, exercise restrictions, and behavioural considerations. Non-vesting and market vesting conditions are taken into account when estimating the fair value of the option at grant date. Service and non-market vesting conditions are taken into account by adjusting the number of options expected to vest at each reporting date. Market vesting conditions are linked to the Group’s share price performance relative to the performance of the AIM All share index. Non-market vesting conditions are linked to trading performance and service over defined time periods. Cancelled or settled options are accounted for as an acceleration of vesting. The unrecognised grant date fair value is recognised in profit or loss in the year that the options are cancelled or settled. Where the terms of the options are modified and the modification increases the fair value or number of equity instruments granted, measured immediately before and after the modification, the incremental fair value is spread over the remaining vesting period. Options over the Company’s shares granted to employees of subsidiaries are recognised as a capital contribution by the Company to the subsidiaries. TAXATION Taxation expense includes the amount of current income tax payable and the charge for the year in respect of deferred taxation. The income tax payable is based on an estimation of the amount due on the taxable profit for the year. Taxable profit is different from profit before tax as reported in the statement of comprehensive income because it excludes items of income or expenditure which are not taxable or deductible in the year as a result of either the nature of the item or the fact that it is taxable or deductible in another year. The Group’s liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the reporting date. Income tax credits for research and development activities are recognised on a cash basis or when their receipt is reasonably certain. Deferred tax is accounted for on the basis of temporary differences arising from the differences between the tax base and accounting base of assets and liabilities. Deferred tax is recognised for all taxable temporary differences, except to the extent where it arises from the initial recognition of an asset or liability in a transaction that is not a business combination. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax is recognised on income or expenses from subsidiaries that will be assessed or allow for tax in future periods except where the Group is able to control the reversal of the timing difference and it is probable that the timing difference will not reverse in the foreseeable future. Deferred tax is charged or credited to the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case it is dealt with within equity. It is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. INTANGIBLE ASSETS Intangible assets purchased separately from a business are capitalised at their cost. Intellectual Property, Customer Relationships and Patents The Group makes an assessment of the fair value of intangible assets arising on acquisitions. These include Intellectual Property, Customer Relationships and Patents. An intangible asset will be recognised as long as the asset is identifiable and its fair value can be measured reliably. An intangible asset is identifiable if it is separable or if it was obtained through contractual or legal rights. Amortisation is provided on the fair value of the asset and is calculated on a straight line basis over its useful life. The useful life for Intellectual Property, Customer Relationships and Patents is between five and ten years. Amortisation is recognised within the statement of comprehensive income. All intangible assets except Goodwill are amortised. 32 Instem plc Annual Report, 2016 accounting policies Goodwill Goodwill on acquisitions, being the excess of the fair value of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities acquired, is capitalised and tested for impairment on an annual basis. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. For the purpose of impairment testing goodwill is allocated to cash generating units of Instem plc, which represent the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Computer Software Computer software is carried at cost less accumulated amortisation and any impairment loss. Externally acquired computer software and software licences are capitalised and amortised on a straight line basis over their useful economic lives of three years. Costs relating to development of computer software for internal use are capitalised once the recognition criteria of IAS 38 “Intangible Assets” are met. When the software is available for its use, these costs are amortised over the estimated useful life of the software. Internally generated intangible assets Expenditure on research activities is recognised in the statement of comprehensive income as incurred. Expenditure arising from the Group’s development of software for sale to third parties is recognised only if all of the following conditions are met: • • • • • • an asset is created that can be identified; it is probable that the asset created will generate future economic benefits; the development cost of the asset can be measured reliably; the Group has the intention to complete the asset and the ability and intention to use or sell it; the product or process is technically and commercially feasible; and sufficient resources are available to complete the development and to either sell or use the asset. Where these criteria have not been achieved, development expenditure is recognised in profit or loss in the period in which it is incurred. Internally-generated intangible assets are amortised, once the product is available for use, on a straight-line basis over their useful lives (five to eight years). PROPERTY, PLANT & EQUIPMENT Property, plant and equipment are stated in the statement of financial position at cost less accumulated depreciation and provision for impairments. Depreciation is provided on all assets so as to write off the cost less estimated residual value on a straight line basis as follows: Short leasehold property IT hardware and software - Over term of lease - 12½% - 33% per annum The expected useful lives and residual values of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income. IMPAIRMENT OF ASSETS EXCLUDING GOODWILL The carrying value of property, plant and equipment and intangible assets (excluding goodwill) is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. At each reporting date the Group reviews the carrying value of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash flows that are independent from other assets the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the assets is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised in profit or loss immediately. INVENTORY Inventory is stated at the lower of cost and net realisable value. The cost of work in progress comprises direct labour and other direct costs and includes billable employee expenses. Provision is made where necessary for obsolete and slow moving inventory. FINANCIAL INSTRUMENTS Classification of financial instruments Financial instruments are classified as financial assets, financial liabilities or equity instruments. Instem plc Annual Report, 2016 33 accounting policies Recognition and valuation of financial assets Financial assets are initially recorded at their fair value net of transaction costs. At each reporting date, the Group reviews the carrying value of its financial assets to determine whether there is objective evidence of an indication of impairment. If any such indication exists, the recoverable amount is estimated and any identified impairment loss is recognised in the statement of comprehensive income. Investments Investments in subsidiaries are recorded at cost in the statement of financial position. They are tested for impairment when there is objective evidence of impairment. Any impairment losses are recognised in the statement of comprehensive income in the period they occur. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and cash deposits which are readily convertible to a known amount of cash. For the purposes of the cash flow statement, cash and cash equivalents include bank overdrafts which are repayable on demand as these form an integral part of Group cash management. Trade receivables Trade receivables are classified as loans and receivables and are initially recognised at fair value. They are subsequently measured at their amortised cost using the effective interest method less any provision for impairment. A provision for impairment is made where there is objective evidence that amounts will not be recovered in accordance with original terms of the agreement. A provision for impairment is established when the carrying value of the receivable exceeds the present value of the future cash flows discounted using the original effective interest rate. The carrying value of the receivable is reduced through the use of an impairment provision account and any impairment loss is recognised in the statement of comprehensive income. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Bank borrowings and loan notes Interest-bearing loan notes and bank overdrafts are recorded initially at their fair value, net of direct transaction costs. Such instruments are subsequently carried at their amortised cost and finance charges are recognised in the statement of comprehensive income over the term of the instrument using an effective rate of interest. Finance charges are accounted for on an accruals basis to the statement of comprehensive income. Overdrafts are offset against cash and cash equivalents when the Group has a legal right of off-set. Trade and other payables Trade and other payables are not interest bearing and are initially recognised at fair value and subsequently at amortised cost. Ordinary share capital For ordinary share capital, the par value is recognised in share capital and the premium in the share premium reserve. Derivative financial instruments The Group’s activities expose it primarily to foreign currency risk. The Group uses forward contracts to hedge this exposure. RETIREMENT BENEFITS Defined contribution schemes A defined contribution scheme is a pension plan under which the Group pays a fixed contribution to a scheme with an external provider. The amount charged to the statement of comprehensive income in respect of pension costs and other post-retirement benefits is the total of contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either other payables or other receivables in the statement of financial position. The Group has no further payment obligations once the contributions have been paid. Defined benefit scheme A defined benefit scheme is a pension plan under which the Group pays contributions in order to fund a defined amount of pension that the employees under the scheme will receive on retirement. The cost of providing the benefits is determined using the projected unit credit method with actuarial valuations being carried out regularly. An asset or liability is recognised equal to the present value of the defined benefit obligation, adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Actuarial gains and losses are recognised in the statement of other comprehensive income in the year in which they occur, whilst expected returns on plan assets, servicing costs and financing costs are recognised in the statement of comprehensive income. The rate used to discount the benefit obligations is based on market yields for high quality corporate bonds with terms and currencies consistent with those of the benefit obligations. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Certain year end asset and liability amounts reported in the financial information are based on management estimates and assumptions. There is therefore a risk of significant changes to the carrying amounts of these assets and liabilities within the next financial year. The estimates and assumptions are made on the basis of information and conditions that existed at the time of the valuation. Fair value of assets acquired and calculation of contingent consideration (see note 10) The amounts presented in the statement of financial position in respect of the fair values of assets acquired are estimated by the Group’s management based on prior experience and information available at the time of the acquisition. Key assumptions and judgements are required to both identify and measure the identifiable assets acquired. It is the opinion of management, that in respect of both acquisitions, the identifiable intangible assets acquired relate to Intellectual Property and Customer Relationships. The fair value of such assets represents the estimated future earnings discounted to their net present value. The assessment of these future earnings includes estimates and judgements such as the use of an appropriate royalty rate in respect of the calculation and modelling of the intellectual 34 Instem plc Annual Report, 2016 accounting policies property asset, the assessment of potential future earnings and the useful economic life of each identifiable asset acquired. IAS 12 ‘Recognition of Deferred Tax Assets for Unrealised Losses’ (Amended) effective - 1 January 2017 IAS 7 ‘Disclosure initiative’ (Amended) effective - 1 January 2017 IFRS 2 ’Classification and Measurement of Share Based Payment’ (Amended) effective - 1 January 2018 IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’ effective - 1 January 2018 The directors are reviewing the implications of IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’ to consider the implications on the financial statements. The directors do not believe that the other standards above will have a material impact on the financial statements. IFRSs ADOPTED IN THE YEAR The following IFRSs, IASs and IFRICs have been adopted for the first time in the year: As expected their adoption has not had a material impact on these financial statements. IAS 1 ‘Presentation of Financial Statements’ (Amended) effective - 1 January 2016 IFRS 10 ‘Consolidated Financial Statements’ (Amended) effective - 1 January 2016 IFRS 12 ‘Disclosure of Interests in Other Entities’ (Amended) effective - 1 January 2016 IAS 27 ‘Equity Method in Separate Financial Statements’ (Amended) effective - 1 January 2016 IAS 16 and IAS 38 ‘Clarification of Acceptable Methods of Depreciation and Amortisation’ (Amendments) effective - 1 January 2016 The directors have reviewed the sensitivity of the royalty rate assumption in the Samarind valuation of acquired intangible assets. A 10% decrease in the assumed royalty rate would result in approximately a £0.14m increase in goodwill, £0.17m less acquired intangible assets and £0.03m less deferred tax liability arising on acquisition. The subsequent impact of amortisation charge for the year ended 31 December 2016 would be a reduced charge of £0.02m. The directors have reviewed the sensitivity of the royalty rate assumption in the Notocord valuation of acquired intangible assets. A 10% decrease in the assumed royalty rate would result in approximately a £0.17m increase in goodwill, £0.21m less acquired intangible assets and £0.04m less deferred tax liability arising on acquisition. The subsequent impact of amortisation charge for the year ended 31 December 2016 would be a reduced charge of £0.01m. The contingent consideration provided in the financial statements is measured initially at its acquisition-date fair value. The consideration in respect of both Samarind and Notocord include deferred contingent consideration, which is dependent on financial performance of the acquired businesses. The estimation of fair values includes management’s best estimate to the outcome of such performance using detailed forecasts of the acquired business. Recognition of deferred tax assets The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits. The amount recognised in the consolidated financial statements is derived from management’s best estimation and judgement incorporating forecasts and all available information. Recognition therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. 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 2016. The Group and Company have chosen not to adopt any amendments or revised standards early. IFRSs ISSUED BUT NOT YET EFFECTIVE The following IFRSs, IASs and IFRICs have been issued, are not yet effective, and have not been adopted by the Group or the Company in these financial statements. IFRS 15 ‘Revenue from Contracts with Customers’ effective - 1 January 2018 IFRS 9 ‘Financial Instruments’ effective - 1 January 2018 IFRS 16 ‘Leases’ effective - 1 January 2019 Instem plc Annual Report, 2016 35 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 1. Segmental Reporting For management purposes, the Group is currently organised into one operating segment – Global Life Sciences. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. REVENUE BY PRODUCT TYPE Licence fees Annual support fees SaaS subscription fees Professional services Funded development initiatives REVENUE BY GEOGRAPHICAL LOCATION UK Rest of Europe USA and Canada Rest of World NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION BY GEOGRAPHICAL LOCATION UK USA and Canada Rest of World 2016 £000 4,162 8,890 2,853 2,414 - 2015 £000 4,612 7,383 2,076 2,042 208 18,319 16,321 2016 £000 3,329 3,232 9,829 1,929 2015 £000 2,004 3,592 9,429 1,296 18,319 16,321 2016 £000 17,750 165 66 17,981 2015 £000 12,331 39 41 12,411 Major customers There were no customers which represented more than 10% of the Group revenue in 2016 (2015: nil). 36 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 2. Profit/(Loss) before Non-Recurring Income/(Costs) 2016 £000 2015 £000 Profit/(loss) from operations includes the following significant items: Depreciation and amounts written off property, plant and equipment: Charge for the year: Owned assets Leased assets Loss on disposal of property, plant and equipment Amortisation of intangible assets Research and development costs Operating lease rentals: Plant and machinery Land and buildings Amounts payable to RSM UK Audit LLP and their associates in respect of both audit and non-audit services: Audit services: Statutory audit of parent and consolidated financial information Audit of subsidiaries where such services are provided by RSM UK Audit LLP or its associates Other services: Audit related assurance services Taxation services - Compliance Taxation services - Advisory Due diligence 126 30 2 1,047 1,840 39 481 17 64 16 18 4 47 137 19 - 1,016 1,302 3 365 16 51 11 12 10 - The following table analyses the nature of expenses: 166 100 2016 £000 Staff costs (see note 6) 10,706 Operating lease rentals Software maintenance charges Licence costs 520 444 599 Other expenses 4,574 Total cost of sales, distribution costs, administrative expenses and other operating expenses 16,843 2015 £000 8,666 368 318 593 3,608 13,553 Instem plc Annual Report, 2016 37 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 3. Non-Recurring Items Professional fees in respect of acquisitions Amendment to consideration payable in respect of Instem Clinical Restructuring costs in respect of Instem Clinical Amendment to contingent consideration post acquisition in respect of Samarind 2016 £000 (249) 690 (149) 327 619 2015 £000 (25) (1,401) - - (1,426) The professional fees relate to the acquisition of Samarind Limited on 27 May 2016 and Notocord Systems S.A. on 2 September 2016 (see note 10). During the year, the Group reached agreement with the previous owners of Instem Clinical resulting in the release of the Group from its obligations to pay the final consideration payments. The contingent consideration in respect of Samarind Limited was estimated at its fair value at the date of acquisition. This was re-measured at the reporting date and the estimation of the contingent consideration has reduced. The 2015 non-recurring charge of £1.4m arose following the early agreement of the final deferred contingent consideration relating to the 2013 acquisition of Instem Clinical (formerly Logos Technologies). 4. Finance Income 5. Finance Costs Bank interest Bank loans and overdrafts Unwinding discount on deferred consideration Net interest charge on pension scheme Foreign exchange losses Finance lease interest 2016 £000 - 2016 £000 32 120 139 347 8 646 2015 £000 4 2015 £000 86 36 140 6 4 272 38 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 6. Employees Average monthly number (including non-executive directors) By role: Directors, administration and supervision Software design, sales and customer service Employment costs: Wages and salaries Social security costs Other pension costs 2016 Number 2015 Number 42 154 196 2016 £000 9,045 890 771 10,706 40 118 158 2015 £000 7,421 636 609 8,666 In addition to the above employment costs, the Group had non-recurring employment costs of £0.15m (2015:£nil) as disclosed in note 3. The Company has three employees during the year and in the prior year. These employees are non-executive directors of the Company and their remuneration is disclosed in note 8. Instem plc Annual Report, 2016 39 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 7. Share Based Payment Equity-settled share option plan Under the approved and unapproved share option schemes, the Remuneration Committee can grant options to employees of the Group. Options are granted with a fixed exercise price at the date of grant. The contractual life is generally ten years from the date of grant. Options generally become exercisable after three years. Certain options issued to directors and senior employees carry market based performance conditions. 2016 2015 Weighted average exercise Number price (£) Outstanding at the beginning of the year 1,387,016 Granted 104,558 Lapsed (141,250) Exercised (141,231) Outstanding at end of the year 1,209,093 Exercisable at end of year 784,535 1.02 0.10 0.10 0.83 1.07 1.59 Weighted average exercise price (£) 1.71 0.10 - 1.12 1.02 1.01 Number 800,332 596,684 - (10,000) 1,387,016 1,227,191 The options outstanding at 31 December 2016 and 31 December 2015 had exercise prices of £0.10, £0.90, £1.115, £1.75, £1.76, £2.215 and £2.22 and a weighted average remaining contractual life of 6 years 1 month (2015: 7 years 1 month). A charge of £0.2m (2015: £0.3m) arose in respect of share based payment. New options are valued using the Black-Scholes option-pricing model. The fair market value of option awards granted during the year has been estimated using the following key assumptions: Average exercise price Average market price Average vesting period (years) Expected volatility Option life (years) Expected life Risk free rate Expected dividend yield Expected lapse rate 2016 0.10 2.67 3 19.0 10 3 2% - - Fair value of options 2.40 Volatility since listing has been calculated using the daily mid-market share price. The expected life used in the model has been adjusted, based upon the management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. Options over 474,960 shares (2015: 556,599 shares) incorporate a market performance condition based on the Company’s share price. Options over 490,400 shares (2015: 596,684) incorporate a condition based on the performance of either the Group or the individual performance of a subsidiary. The fair value of options granted in the year is £0.3m (2015: £1.1m). During the year, the average share price in respect of share options exercised is £2.55 (2015: £2.06). 40 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 8. Directors’ Emoluments Amounts payable by Instem plc: Emoluments* Amounts payable by subsidiary companies: Emoluments Defined contribution pension contributions Total emoluments 2016 £000 112 335 40 487 2015 £000 92 318 37 447 2016 Number 2015 Number Number of directors to whom retirement benefits are accruing under: Defined contribution schemes 2 2 * The above emoluments include £30,000 (2015: £24,000) payable to third parties as shown in note 29. The highest paid director is shown in the Directors’ Remuneration Report. Instem plc Annual Report, 2016 41 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 9. Taxation Income taxes recognised in profit or loss: UK corporation tax on profit/(loss) of the year Amounts in respect of previously unrecognised losses Current tax: Foreign tax Foreign tax in respect of previous years Adjustments in respect of previous years Adjustments in respect of R&D tax credit Total current tax Deferred tax: Current year credit Amounts in respect of previously unrecognised losses Adjustment in respect of previous years Retirement benefit obligation Effects of domestic tax rate change on opening balances Total deferred tax Total income tax (credit)/expense recognised in the current year The income tax expense can be reconciled to the accounting profit as follows: Profit/(loss) before tax multiplied by standard rate of corporation tax in Profit/(loss) before tax the UK 20% (2015: 20.25%) Effects of: (Income)/expenses not (allowable)/deductible for tax purposes Fixed asset temporary differences Differences in overseas tax rates Adjustments in respect of prior years Foreign tax suffered in excess of double tax relief Effects of domestic tax rate change on opening balances Adjustment in respect of R&D tax credit Other temporary differences Tax losses utilised Tax losses carried forward not previously recognised Overseas tax losses not carried forward Total income tax (income)/expense recognised in consolidated statement of comprehensive income 2016 £000 244 (141) 400 (45) (312) (350) (204) (421) (459) (73) 76 46 (831) (1,035) 2016 £000 23 5 (23) 164 85 (430) 110 46 (350) (97) (141) (526) 122 (1,035) 2015 £000 98 - 411 (302) 61 (173) 95 (315) - 179 52 56 (28) 67 2015 £000 (361) (73) 341 17 113 (62) - 56 (173) (152) - - - 67 The reduction in the applicable tax rate is due to legislation included in the Finance Act 2013 to reduce the main rate of UK corporation tax from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015. The tax rate which has been substantively enacted as at 31 December 2016 is 17% in respect of periods from 1 April 2020 following legislation in the Finance Act 2015. 42 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 10. Acquisition of Subsidiaries Company Principal activity Date of acquisition Proportion of voting equity interests acquired % Consideration £000 Samarind Limited Provider of Regulatory Information Management software and services to Life Science sector 27 May 2016 100 2,324 Samarind Limited was acquired to continue the expansion and development of the Group’s capabilities in the Global Life Sciences sector. Consideration Initial cash consideration (including £13,000 stamp duty) Initial share consideration Deferred consideration (27 May 2017) – To be settled in cash or shares Deferred contingent consideration (27 May 2017) – To be settled in cash or shares Deferred consideration (27 May 2018) – To be settled in cash or shares Discounting of estimated future cashflows Fair value of consideration £000 1,313 200 450 350 200 2,513 (189) 2,324 The contingent consideration is based on certain performance related conditions in respect of the first twelve months. The deferred 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 as disclosed in note 3. Acquisition related costs amounting to £0.07m have been excluded from the consideration transferred and have been recognised as an expense in the current year, within the ‘Non-recurring income/(costs)’ line item 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 Intellectual property Customer relationships Property, plant and equipment Current Assets Trade and other receivables Cash and cash equivalents Current tax Current Liabilities Trade and other payables Deferred income Non-Current Liabilities Deferred tax on acquisition Fair value of identifiable net assets acquired 1,047 921 16 104 697 119 (416) (404) (354) 1,730 Instem plc Annual Report, 2016 43 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 10. Acquisition of Subsidaries (continued) Goodwill arising on acquisition Consideration transferred Less: fair value of identifiable net assets acquired £000 2,324 (1,730) Goodwill arising on acquisition 594 The impact of the acquisition on the Group’s assets and liabilities is set out above. The fair value of the assets and liabilities may be adjusted for circumstances that are revealed within 12 months of the date of acquisition. The value of goodwill arose on the acquisition of Samarind Limited because the premium paid by the Group reflected the expected benefit of synergies, revenue growth and future market development. Samarind Limited was acquired to expand and enhance the Group’s product and service offering within the Global Life Sciences operating segment. These benefits have not been recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. The fair value of the identifiable net assets acquired as reported in the interim statement as at 30 June 2016 were provisional. Following the interim report, the Group has thoroughly reviewed the fair value of identifiable net assets and the values are reflected in the table on the previous page. Impact of acquisition on the results of the Group Included in the profit for the year is a loss of £0.05m attributable to the additional business generated by Samarind Limited. Revenue for the year includes £0.53m in respect of Samarind Limited. Had this business combination been effected at 1 January 2016, the revenue of Samarind from continuing operations would have been £0.92m, and the profit for the year from continuing operations would have approximated break even. The directors consider these numbers to represent an approximate measure of the performance of Samarind on an annualised basis and to provide a reference point for comparison in future years. Subsidiary acquired Company Principal activity Date of acquisition Proportion of voting equity interests acquired % Consideration £000 Notocord Systems S.A. (including Notocord Inc.) Provider of software into preclinical Safety Pharmacology sector 2 September 2016 100 2,482 Notocord Systems S.A. and Notocord Inc. were acquired to continue the expansion and development of the Group’s capabilities in the preclinical Safety Pharmacology sector, which is adjacent to Instem’s core Toxicology/Pathology sector. Consideration Initial cash consideration - €2.3m (including €0.3m consideration in respect of acquired cash balances) Deferred contingent consideration (30 March 2017) Discounting of estimated future cashflows Fair value of consideration £000 1,976 533 2,509 (27) 2,482 The contingent consideration is based on certain performance related conditions in respect of the years ending 31 December 2016 and 31 December 2017. The maximum deferred contingent consideration which would be payable if all performance conditions were met would be £1.7m (€2.0m). Acquisition related costs amounting to £0.18m have been excluded from the consideration transferred and have been recognised as an expense in the current year, within the ‘Non-recurring income/(costs)’ line item in the consolidated statement of comprehensive income. 44 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 10. Acquisition of Subsidaries (continued) Fair value of assets acquired and liabilities recognised at the date of acquisition Fair Value £000 Non-Current Assets Intellectual property Customer relationships Property, plant and equipment Current Assets Trade and other receivables Cash and cash equivalents Current tax Current Liabilities Trade and other payables Deferred income Non-Current Liabilities Deferred tax on acquisition Fair value of identifiable net assets acquired Goodwill arising on acquisition Consideration transferred Less: fair value of identifiable net assets acquired 1,258 996 14 148 245 (355) (101) (232) (405) 1,568 £000 2,482 (1,568) Goodwill arising on acquisition 914 The impact of the acquisition on the Group’s assets and liabilities is set out above. The fair value of the assets and liabilities may be adjusted for circumstances that are revealed within 12 months of the date of acquisition. The value of goodwill arose on the acquisition of Notocord Systems S.A. because the premium paid by the Group reflects the expected benefit of synergies, revenue growth and future market development. Notocord Systems S.A. was acquired to expand and enhance the Group’s product and service offering within the Safety Pharmacology sector. These benefits have not been recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. Impact of acquisition on the results of the Group Included in the profit before tax for the year is a profit of £0.15m attributable to the additional business generated by Notocord Systems S.A. and Notocord Inc. Revenue for the year includes £0.53m in respect of Notocord Systems S.A. and Notocord Inc. Had this business combination been effected at 1 January 2016, the revenue of Notocord from continuing operations would have been in the region of £1.8m, and the profit for the year from continuing operations would have been in the region of £0.4m. The directors consider these numbers to represent an approximate measure of the performance of Notocord Systems S.A. and Notocord Inc. on an annualised basis and to provide a reference point for comparison in future years. Instem plc Annual Report, 2016 45 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 11. Intangible Assets Goodwill Software property relationships Patents Group £000 £000 £000 £000 £000 Intellectual Customer Cost At 1 January 2015 9,507 2,262 2,222 Additions from continuing operations - 612 - At 31 December 2015 9,507 2,874 2,222 Additions from continuing operations - Additions from acquisitions 1,508 Exchange adjustment - 890 - 10 At 31 December 2016 11,015 3,774 Amounts written off At 1 January 2015 Amortisation expense At 31 December 2015 Amortisation expense Exchange adjustment At 31 December 2016 Net book value - - - - - - At 31 December 2015 9,507 At 31 December 2016 11,015 1,069 375 1,444 380 11 1,835 1,430 1,939 - 2,305 - 4,527 1,049 444 1,493 442 - 1,935 729 2,592 957 - 957 - 1,917 - 2,874 397 192 589 224 - 813 368 2,061 21 - 21 - - - 21 15 5 20 1 - 21 1 - Total £000 14,969 612 15,581 890 5,730 10 22,211 2,530 1,016 3,546 1,047 11 4,604 12,035 17,607 The gross carrying amount and accumulated amortisation within Software includes internally generated and externally acquired elements. The cost of internally generated software amounts to £3.0m (2015: £2.3m) with accumulated amortisation of £1.2m (2015: £0.9m). Software additions for the year include £0.8m relating to internal development (2015: £0.6m). Impairment of goodwill Goodwill amounting to £5.9m (2015: £5.9m) relates to a cash generating unit (CGU), being the Instem business acquired on the management buyout of Instem LSS Limited on 27 March 2002. Goodwill amounting to £0.5m (2015: £0.5m), relates to a CGU, being the Instem Scientific Limited business acquired on 3 March 2011. Goodwill amounting to £2.5m (2015: £2.5m), relates to a CGU, being the Instem Clinical Holdings Limited business acquired on 10 May 2013. Goodwill amounting to £0.7m (2015: £0.7m) relates to a CGU, being the Perceptive Instruments Limited business acquired on 21 November 2013. During the year, the Group acquired goodwill amounting to £0.6m and £0.9m in respect of the acquisition of Samarind and Notocord respectively (see note 10). During the year, goodwill was tested for impairment in accordance with IAS 36 “Impairment of Assets”. The recoverable amount of the CGU exceeded the carrying amounts of goodwill. The recoverable amount for each of the CGU has been measured using a value- in-use calculation and as such no impairment was deemed necessary. The key assumptions used, which are based on management’s past experience, for the value-in-use calculations are those regarding the discount rates, growth rates and direct costs during the period. The value–in-use calculations are based on the future cash flows from approved forecasts which have been extrapolated to cover a period of five years, and then a terminal value calculated using the Gordon Growth Model, to take account of the software development cycle and the high percentage of recurring revenues from the customer base. At 31 December 2016, a pre-tax discount rate of 9.1% (2015: 8.9%) was used in the value-in-use calculation based on the Group’s cost of capital. 46 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 11. Intangible Assets (continued) Projected cash flows were based on detailed profit and cashflow projections through to 2017 with a 2.5% assumption of growth beyond 2017. The projections were based on reasonable assumptions in respect of business growth rates, payroll and other cost increases and related cashflow impacts. No indication of impairment was identified. The recoverable amount of the Instem LSS CGU exceeds the carrying amount of this CGU by 335%, for the Instem Scientific CGU by 848%, for Instem Clinical CGU by 249%, Perceptive Instruments CGU by 898%, Samarind CGU by 443% and Notocord CGU by 351%. The directors consider the discount rate and revenues to be the most sensitive assumptions used in the impairment reviews. An additional increase in the discount rate of 24%, or a reduction in certain revenues of in excess of 3%, would result in the recoverable amount of the Instem LSS CGU being equal to its carrying amount. An additional increase of 68% in the Instem Scientific discount rate, or a reduction in revenues of 10% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional increase of 15% in the Instem Clinical discount rate, or a reduction in revenues of 9% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional increase of 30% in the Perceptive Instruments discount rate, or a reduction in revenues of 17% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional increase of 30% in the Samarind discount rate, or a reduction in revenues by 30% would result in the recoverable amount of the CGU being equal to its carrying value. An additional increase of 24% in the Notocord discount rate, or a reduction in revenues by 24% would result in the recoverable amount of the CGU being equal to its carrying value. Amortisation expenses are disclosed in the Consolidated Statement of Comprehensive Income. 12. Investments Company Cost at beginning of year Additions At end of year £000 23,395 5,031 28,426 During the year, the Company acquired the investment in Samarind Limited and Notocord Systems S.A. At the end of the year the company has six wholly-owned subsidiaries and twelve wholly-owned sub-subsidiaries, details of which are as follows: Company Registered Address Activity Ownership Instem Life Science Systems Diamond Way Limited Stone Business Park (company number 04339129) Stone, Staffordshire England and Wales ST15 0SD Instem LSS Limited (company number 03548215) England and Wales Diamond Way Stone Business Park Stone, Staffordshire ST15 0SD Instem LSS (North America) Diamond Way Holding Company 100% by Instem plc Software development, sales, sales support and administrative support 100% by Instem Life Science Systems Limited Limited Stone Business Park Sales, sales support and 100% by Instem LSS (company number 02126697) Stone, Staffordshire administrative support Limited England and Wales ST15 0SD Instem LSS (Asia) Limited (company number 1371107) Hong Kong Instem Information Systems (Shanghai) Limited (company number 310115400257075) Shanghai, PRC Suite 1106-8 11/F Tai Yau Building No 181 Johnston Road Wanchai Room 205, Building 16 88 Da’erwen Road Zhanjiang High Tech Park Pudong District 201203 Holding Company 100% by Instem LSS Limited Sales, sales support and service 100% by Instem LSS (Asia) Limited Instem plc Annual Report, 2016 47 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 12. Investments (continued) Company Registered Address Activity Ownership Instem Scientific Limited (company number 03861669) England and Wales Diamond Way Stone Business Park Stone, Staffordshire ST15 0SD Instem Scientific Solutions Diamond Way Limited Stone Business Park (company number 03598020) Stone, Staffordshire England and Wales ST15 0SD Instem Scientific Inc. 161 Washington Street Suite 1550 USA 8 Tower Bridge Conshohocken PA 19428 Instem India Pvt Limited (company number U73100MH2012FTC231951) India 302, Third Floor Lalani Quantum Bavdhan (Budruk) Pune 411021 Instem Clinical Holdings Diamond Way Limited Stone Business Park (company number 05840032) Stone, Staffordshire England and Wales ST15 0SD Instem Clinical Limited (company number 06959053) England and Wales Diamond Way Stone Business Park Stone, Staffordshire ST15 0SD Suite 1550 Instem Clinical Inc. 161 Washington Street USA Logos Technologies Limited (company number 05836842) England and Wales 8 Tower Bridge Conshohocken PA 19428 Diamond Way Stone Business Park Stone, Staffordshire ST15 0SD Perceptive Instruments Diamond Way Limited Stone Business Park (company number 02498351) Stone, Staffordshire England and Wales ST15 0SD Leading provider of software solutions for extracting intelligence 100% by Instem plc from R&D related healthcare data Dormant 100% by Instem Scientific Limited Leading provider of software solutions for extracting intelligence from R&D related healthcare data Software development Holding of intellectual property rights and investment in group companies Provision of electronic data capture and clinical management solutions to the pharmaceutical industry Provision of electronic data capture and clinical management solutions to the pharmaceutical industry 100% by Instem Scientific Limited 99.9% by Instem LSS Limited 0.1% by Instem LSS (NA) Limited 100% by Instem plc 100% by Instem Clinical Holdings Limited 100% by Instem Clinical Holdings Limited Dormant 100% by Instem Clinical Holdings Limited Development, manufacture and supply of software and hardware products for in vitro study data collection and 100% by Instem plc study management in the genetic toxicology, microbiology and immunology markets 48 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 12. Investments (continued) Company Registered Address Activity Ownership Instem Japan K.K (company number 0104-01-120355) Japan Samarind Limited (company number 02105894) England and Wales Notocord Systems S.A. (company number 350927349) France Shinagawa Intercity Tower A Level 28 2-15-1 Konan Minato-ku Tokyo 108-6028 Diamond Way Stone Business Park Stone, Staffordshire ST15 0SD 113 Chemin de Ronde Croissy-sur-Seine Paris 78290 Suite 1550 Sales, sales support and 100% by Instem LSS service Limited Provider of regulatory information management 100% by Instem plc software Software development, sales support and 100% by Instem plc administrative support Notocord Inc. USA 161 Washington Street Sales, sales support and 100% by Notocord Systems 8 Tower Bridge administrative support S.A. Conshohocken PA 19428 Instem plc Annual Report, 2016 49 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 13. Property, Plant and Equipment Short leasehold IT hardware & property £000 software £000 Group Cost At 1 January 2015 Additions Exchange adjustment At 31 December 2015 Additions Acquisitions Disposals Exchange adjustment At 31 December 2016 Depreciation At 1 January 2015 Depreciation expense Exchange adjustment At 31 December 2015 Depreciation expense Acquisitions Disposals Exchange adjustment At 31 December 2016 Net book value At 31 December 2015 At 31 December 2016 74 - - 74 3 - (1) 3 79 26 17 (2) 41 14 - (1) 3 57 33 22 Total £000 1,963 266 2 2,231 113 103 (1,385) 74 1,136 1,700 156 (1) 1,855 156 73 1,889 266 2 2,157 110 103 (1,384) 71 1,057 1,674 139 1 1,814 142 73 (1,382) (1,383) 58 705 343 352 61 762 376 374 IT hardware and software includes assets with a net book value of £0.10m (2015: £0.13m) held under finance lease. The depreciation on these assets during the year was £0.03m (2015: £0.02m). 50 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 14. Inventories Group Raw materials Work in progress Total gross inventories 15. Trade and Other Receivables Group Trade receivables Amounts recoverable on contracts Prepayments and accrued income Company Amounts owed by group companies Other receivables 2016 £000 27 889 916 2016 £000 916 2016 £000 5,104 894 901 6,899 2,217 84 2,301 2015 £000 14 808 822 2015 £000 822 2015 £000 2,788 1,395 562 4,745 2,589 32 2,621 A provision for impairment is made where there is objective evidence of impairment which is usually indicated by a delay in the expected cash flows or non-payment from customers. An analysis of the provision for impairment of receivables is as follows: Group At beginning of year Increase in provision for impairment Reversal of provision for impairment At end of year 2016 £000 232 9 (147) 94 2015 £000 23 209 - 232 The average credit period taken on sale is 68 days (2015: 57 days). No interest has been charged on overdue receivables. Before accepting any new significant customer, the Group obtains relevant credit references to assess the potential customer’s credit quality. Credit limits are defined by customer. The directors consider that the carrying amount of trade and other receivables approximates to their fair value. Instem plc Annual Report, 2016 51 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 15. Trade and Other Receivables (continued) The age profile of the net trade receivables for the Group at the year-end was as follows: Group 2015 Current 0-30 days 31-60 days Over 60 days Total Debt age Trade receivables/Amounts recoverable on contracts Value (£000) % 3,711 89 344 8 17 - 111 3 4,183 100 Group 2016 Current 0-30 days 31-60 days Over 60 days Total Debt age Trade receivables/Amounts recoverable on contracts Value (£000) % 4,434 74 565 10 501 8 498 8 5,998 100 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. The Group does not hold any collateral as security. An analysis of trade and other receivables by currency is as follows: Group Sterling Euro US Dollar Renminbi Other 16. Financial Asset 2016 £000 2,511 784 3,056 488 60 6,899 2015 £000 1,815 162 2,452 270 46 4,745 Group and Company Forward foreign exchange contract 2016 £000 10 2015 £000 - At the reporting date the Group and Company had one short term forward foreign exchange contract to purchase Euros at a guaranteed rate. The above represents the fair value of the contract at 31 December 2016. There were no contracts in place as at 31 December 2015. The credit has been recognised in the consolidated statement of comprehensive income and reflected in foreign exchange losses within finance costs. 52 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 17. Cash and Cash Equivalents Group Cash at bank Bank overdraft Company Cash at bank 2016 £000 13,187 (8,998) 4,189 2,221 2015 £000 11,181 (8,998) 2,183 24 The Group’s committed overdraft facility has a net limit of £2.0m and a gross limit of £9.0m. Interest is charged on the bank overdraft at 2.75% above base rate. The bank overdraft is secured by fixed and floating charges over certain of the Group’s assets. The bank facility is reviewed in April each year. There is a debenture in favour of National Westminster Bank Plc, dated 13 April 2011, secured over the assets of the Group by way of fixed and floating charges, in respect of the Group’s overdraft facility. An analysis of cash and cash equivalents by currency is as follows: Group Sterling Euro US Dollar Renminbi Other Company Sterling Euro 2016 £000 (1,138) 1,687 2,329 1,243 68 4,189 1,165 1,056 2,221 2015 £000 (407) 201 1,529 831 29 2,183 24 - 24 The carrying amount of these assets approximates to their fair value. Instem plc Annual Report, 2016 53 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 18. Trade and Other Payables Group - Current Trade payables Other taxation and social security costs Accruals Company - Current Trade payables Amounts owed to group companies Accruals An analysis of trade and other payables by currency is as follows: Group Sterling Euro US Dollar Renminbi Other Company Sterling 2016 £000 632 276 1,762 2,670 78 4,125 129 4,332 2016 £000 1,595 272 725 31 47 2,670 4,332 2015 £000 487 186 1,124 1,797 37 3,773 14 3,824 2015 £000 1,088 - 677 20 12 1,797 3,824 The directors consider that the carrying amount of trade and other payables approximates to fair value due to their short maturities. The maturity analysis of the trade and other payables for the Group at the year-end was as follows: Group 2015 Trade and other payables (£000) % Group 2016 Trade and other payables (£000) % 19. Current Taxation Current 1,700 95 Current 2,634 99 0-30 days 56 3 0-30 days 24 1 31-60 days Over 60 days 6 - 35 2 31-60 days Over 60 days - - 12 - Total 1,797 100 Total 2,670 100 The Group current tax payable of £0.43m (2015: £0.54m) represents the amount of income taxes payable in respect of current and prior years. The Company current tax payable is £nil (2015: £nil). 54 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 20. Financial Liabilities Group 2015 Deferred consideration Finance lease liabilities Company 2015 Deferred consideration Group 2016 Deferred contingent consideration Finance lease liabilities Total £000 688 145 833 Total £000 688 Total £000 1,108 113 1,221 Less than One to More than one year two years two years £000 £000 £000 357 28 385 331 29 360 - 88 88 Less than One to More than one year two years two years £000 357 £000 331 £000 - Less than One to More than one year two years two years £000 £000 £000 950 29 979 158 32 190 - 52 52 Company Less than One to More than Deferred contingent consideration 2016 Total £000 1,108 one year two years two years £000 950 £000 158 £000 - Deferred contingent consideration The deferred contingent consideration above includes £0.58m (2015: £nil) in respect of the acquisition of Samarind Limited, £0.53m (2015: £nil) in respect of the acquisition of Notocord Systems S.A. and £nil (2015: £0.69m) in respect of Instem Clinical Holdings Limited. During the year, the Group reached agreement with the previous owners of Instem Clinical Holdings Limited resulting in the release of the Group from its obligation to pay the final consideration payments. The estimation of deferred consideration in respect of the acquisition of Samarind Limited and Notocord Systems S.A. is contingent on performance criteria relating to 2017. The carrying value of all deferred consideration has been discounted by an appropriate rate to take account of the time to maturity. Further details are provided in note 21. Instem plc Annual Report, 2016 55 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 20. Financial Liabilities (continued) Finance lease liabilities Minimum lease payments Present value of minimum lease payment 31 December 31 December 31 December 31 December 2016 2015 2016 2015 Not later than one year Later than one year and not later than five years Less future finance charges Present value of minimum lease payments 36 90 126 (13) 113 36 126 162 (17) 145 29 84 113 - 113 28 117 145 - 145 21. Financial Instruments All financial instruments held by the Group, as detailed in this note, are classified as “Loans and Receivables” (trade and other receivables, excluding prepayments, and cash and cash equivalents), “Financial Liabilities Measured at Amortised Cost” (trade and other payables, excluding statutory liabilities, and deferred consideration) and “Fair value through profit and loss” (other financial liabilities which reflect deferred contingent consideration, and a forward contract shown as a financial asset) under IAS 39 ‘Financial Instruments: Recognition and Measurement’. The tables on the following pages analyse recurring assets and liabilities carried at fair value. The different levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability. 2015 Group and Company Level 1 £000 Level 2 £000 Level 3 £000 Deferred contingent consideration - (688) - 2016 Group and Company Level 1 £000 Level 2 £000 Financial asset Deferred contingent consideration - - - 10 - 10 Level 3 £000 - (1,108) (1,108) Total £000 (688) Total £000 10 (1,108) (1,098) The valuation of the financial asset has been made with reference to the guaranteed rate within the forward contract and an appropriate forward rate as at 31 December 2016. 56 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 21. Financial Instruments (continued) The following table shows a reconciliation from the opening balances as at 1 January 2016 to the closing balances as at 31 December 2016 for Level 3 fair value measurements in respect of both the Group and Company. Balance as at 1 January 2016 Acquisition of Samarind Limited Acquisition of Notocord Systems S.A. Unwinding discount* Change in fair value** Adjustment in respect of foreign exchange* Balance as at 31 December 2016 Deferred contingent consideration £000 - 811 506 108 (327) 10 1,108 * Recognised in consolidated statement of comprehensive income and reflected in finance costs ** Recognised in consolidated statement of comprehensive income and reflected in non-recurring income/(costs) The assumptions in respect of the fair value measurement of the deferred contingent consideration is disclosed in note 10. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, foreign exchange rate risk and price risk. The main financial risks managed by the Group, under policies approved by the Board, are interest rate risk, foreign currency risk, liquidity risk and credit risk. The Group has in place risk management policies that seek to limit the adverse effects on the financial performance of the Group by using various instruments and techniques. Derivative financial instruments are only used to hedge exposures arising in respect of underlying business requirements and not for any speculative purpose. Foreign exchange risk The Group operates internationally and is exposed to foreign currency risk on transactions denominated in a currency other than the functional currency and on the translation of the statement of financial position and statement of comprehensive income of foreign operations into sterling. The currencies giving rise to this risk are primarily US dollars. The Group has both cash inflows and outflows in this currency that create a natural hedge. In managing currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s cash inflows and outflows in a foreign currency. The Group also hedges any material foreign currency transaction exposure. Over the longer term, changes in foreign exchange could have an impact on consolidation of foreign subsidiaries earnings. A 10% decrease in the average value of Sterling against the US dollar would have resulted in an increase in the Group’s profit before tax by approximately £0.3m (2015: £0.3m). Interest rate risk The Group operates an interest rate policy designed to minimise interest costs and reduce volatility in reported earnings. The Group’s bank facility does not allow the US Dollar cash balances to generate interest therefore the Group transfers funds from the US dollar account into the sterling account. Currency transfers have been utilised to maximise the interest gains whilst minimising foreign exchange risks. As at 31 December 2016 indications are that the UK bank base interest rate will not materially differ from 0.25% over the next 12 months. On the basis of the floating net cash position at 31 December 2016 and assuming no other changes occur (such as material changes in currency exchange rates) and that no further interest rate management action is taken, the stable interest rates will not have an impact on net interest income/(expense). Instem plc Annual Report, 2016 57 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 21. Financial Instruments (continued) 2015 Group Trade and other receivables Cash and cash equivalents Trade and other payables Deferred consideration Finance lease 2016 Group Trade and other receivables Financial asset Cash and cash equivalents Trade and other payables Deferred contingent consideration Finance lease 2015 Company Trade and other receivables Cash and cash equivalents Trade and other payables Deferred consideration Fixed rate £000 - - - - (145) (145) Fixed rate £000 - - - - - (113) (113) Fixed rate £000 - - - - - Floating rate £000 Non-interest bearing £000 - 2,183 - - - 2,183 4,183 - (1,611) (688) - 1,884 Floating rate £000 Non-interest bearing £000 - - 4,189 - - - 4,189 5,998 10 - (2,394) (1,108) - 2,506 Floating rate £000 Non-interest bearing £000 - 24 - - 24 2,621 - (3,824) (688) (1,891) 2016 Company Trade and other receivables Financial asset Cash and cash equivalents Trade and other payables Deferred contingent consideration Fixed rate £000 Floating rate £000 Non-interest bearing £000 - - - - - - - - 2,221 - - 2,221 2,301 10 - (4,332) (1,108) (3,129) Total £000 4,183 2,183 (1,611) (688) (145) 3,922 Total £000 5,998 10 4,189 (2,394) (1,108) (113) 6,582 Total £000 2,621 24 (3,824) (688) (1,867) Total £000 2,301 10 2,221 (4,332) (1,108) (908) 58 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 21. Financial Instruments (continued) Credit risk Management aims to minimise the risk of credit losses. The Group’s financial assets are bank balances and cash and trade and other receivables, which represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group’s credit risk is primarily attributable to its trade receivables and the Group has policies in place to ensure that sales of products and services are made to customers with appropriate creditworthiness. The amounts presented in the statement of financial position are net of impairment provisions, estimated by the Group’s management based on prior experience and their assessment of the present value of estimated future cash flows. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The Group generates external revenue from no customers which individually amount to more than 10% of the Group revenue (2015: nil). The Group’s exposure to losses from defaults on trade receivables is reduced due to contractual terms which require installation, training, annual licensing and support fees to be invoiced and paid annually in advance. Note 15 sets out the impairment provision for credit losses on trade receivables and the ageing analysis of overdue trade receivables. There were no impairment losses recognised on other financial assets. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial commitments as they fall due. The Group’s objective is to ensure that adequate facilities are available through use of bank overdrafts and finance leases. The Group manages liquidity risk through regular cash flow forecasting and monitoring of cash flows, management review and regular review of working capital and costs. The Group regularly monitors its available headroom under its borrowing facilities. At 31 December 2016, its £2.0m committed bank facility was undrawn (2015: £2.0m undrawn). In respect of the Group’s interest-bearing financial liabilities, the table in note 20 includes details at the reporting date of the periods in which they mature. Instem plc Annual Report, 2016 59 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 22. Deferred Tax Group Deferred tax assets Amounts due to be recovered within 12 months Amounts due to be recovered after 12 months Total deferred tax The movement in the year in the Group’s net deferred tax asset position was as follows: At beginning of the year Net credit to income for the year Net credit to equity Arising on acquisitions during the year Adjustments in respect of prior years Effect of domestic tax rate change on opening balances At end of the year 2016 £000 - 947 947 2016 £000 663 804 215 (762) 73 (46) 947 2015 £000 - 663 663 2015 £000 574 263 61 - (179) (56) 663 The following are the major deferred tax assets and liabilities recognised by the Group and the movements thereon during the year: Accelerated tax Retirement benefit Other timing depreciation Tax losses obligations differences Deferred tax asset/(liability) At 1 January 2015 Credit/(charge) to profit or loss for the year Credit to equity for the year Adjustments in respect of prior years Effects of domestic tax rate change on opening balances £000 (701) 162 - - 71 At 31 December 2015 (468) Credit/(charge) to profit or loss for the year Credit to equity for the year Arising on acquisitions in the year Adjustments in respect of prior years Effects of domestic tax rate change on opening balances 155 - (762) 223 17 At 31 December 2016 (835) Group £000 484 - - (179) (48) 257 654 - - - (14) 897 £000 776 (52) 61 - (78) 707 (76) 215 - - (39) 807 £000 15 153 - - (1) 167 71 - - (150) (10) 78 Total £000 574 263 61 (179) (56) 663 804 215 (762) 73 (46) 947 Management have recognised deferred tax assets in relation to tax losses based on forecast profitability of the Group companies concerned. Unrecognised tax losses not included at 31 December 2016 were £nil (2015: £4.07m) due to uncertainty over the timing of the recoverability of these losses. 60 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations The Group has five active defined contribution schemes and a closed defined benefit scheme: Defined contribution pension schemes Group Personal Pension Plan - the Scheme was created on 31 December 2008. The Scheme is a contributory money purchase scheme with the employer matching employee contributions to a maximum of 5%. The employer also contributes to the Scheme for former members of Instem LSS Pension Scheme at rates varying from 5% to 18%. Employer contributions for the year ended 31 December 2016 were £0.57m (2015: £0.46m). Contracted In Money Purchase Scheme (CIMP) - the Scheme was created on 31 December 2008. The Scheme is a non-contributory scheme created for former members of the Instem LSS Pension Scheme who are US residents. Employer contributions for the year ended 31 December 2016 were £0.03m (2015: £0.03m). Instem LSS (North America) Limited 401k Plan - the Scheme was created for the benefit of employees of Instem LSS (North America) Limited in the USA. The Scheme is a contributory money purchase scheme with the employer matching contributions to the scheme to a maximum of 4.8%. Employer contributions for the year ended 31 December 2016 were £0.08m (2015: £0.08m). BioWisdom GPP Scheme - the Scheme is a Group Personal Pension arrangement with Winterthur Life (now part of Friends Life) and was set up in 2001. Employee members must contribute at least 3% of basic salary and the employer contributes up to a maximum of 6%. Employer contributions for the year ended 31 December 2016 were £0.02m (2015: £0.02m). Perceptive Instruments Limited - The Group made contributions to personal pension arrangements of certain employees however following the introduction of auto enrolment on 1 July 2016 these employees were entered into the Group Personal Pension Plan. During the year ended 31 December 2016 employer contributions to these arrangements prior to autoenrollment totalled £0.01m. (2015: £0.02m). Samarind Group Pension Plan - The Scheme is a Group Personal Pension arrangement with Scottish Widows. Employee members must contribute at least 3% and the employer contributes up a maximum of 3% to the Scheme. During the period ended 31 December 2016 the employer made contributions of £0.01m (2015: £nil). Defined benefit pension scheme The Group also operates a pension scheme providing benefits based on final pensionable pay. This scheme was closed to new members with effect from 8 October 2001 and the rate of future benefit accrual reduced from 1/60th of final pensionable pay per year of service to 1/80th with effect from 6 April 2003. The scheme closed to future accrual on 31 December 2008. The Scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the Scheme is carried out at least once every three years to determine whether the Statutory Funding Objective is met. As part of the process, the Group must agree with the Trustees of the Scheme the contributions to be paid to address any shortfall against the Statutory Funding. The Statutory Funding Objective does not currently impact on the recognition of the Scheme in the accounts. The scheme is in deficit and no contributions payable under a minimum funding requirement are considered potentially refundable or utilisable as a reduction of future contributions. IFRIC interpretation 14 is deemed to be not applicable to the Group. The Scheme is managed by a Board of Trustees appointed in part by the Group and part from elections by members of the Scheme. The Trustees have responsibility for obtaining valuations of the Scheme, administering benefit payments and investing the Scheme assets. The Trustees delegate some of these functions to their professional advisors where appropriate. The Scheme exposes the Group to a number of risks: • • • Investment risk. The Scheme holds investments in asset classes, such as equities, which have volatile market values and while these assets are expected to provide the real returns over the long-term the short-term volatility can cause additional funding to be required if deficit emerges. Interest rate risk. The Scheme’s liabilities are assessed using market yields on high quality corporate bonds to discount the liabilities. As the Scheme holds assets such as equities the value of the assets and liabilities may not move in the same way. Inflation risk. A significant proportion of the benefits under the Scheme are linked to inflation. Although the Scheme’s assets are expected to provide a good hedge against inflation over the long-term, movements over the short-term could lead to deficits emerging. • Mortality risk. In the event that members live longer than assumed a deficit will emerge in the Scheme. Instem plc Annual Report, 2016 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations (continued) There were no Scheme amendments, curtailments or settlements during the year. The latest full actuarial valuation was carried out at 5 April 2014 and was updated to 31 December 2016 by a qualified independent actuary. The following schedule of contributions was prepared by the Trustees of the Instem LSS Pension Scheme (‘the Scheme’) after obtaining the advice of the Scheme Actuary appointed by the Trustees and was intended to clear the deficit in the Scheme at the time it was agreed in June 2015: Period ended 31 March 2016 31 March 2017 31 March 2018 31 March 2019 31 March 2020 31 March 2021 31 March 2022 31 March 2023 30 November 2023 Monthly payment (payable in each month Balancing payment due before period end except the final month in each period) £’000 £’000 15 25 25 25 25 25 25 25 25 262 187 203 220 237 255 273 293 239 The employer pays the Pension Protection Fund levy each year in respect of the scheme. It is intended that all other expenses associated with the running of the Scheme will be met from the Scheme’s assets. The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment portfolio. Expected yields on bonds are based on gross redemption yields at the reporting date whilst the expected returns on the equity and property investments reflect the long-term real rates of return experienced in the respective markets. 62 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations (continued) Discount rate Inflation (RPI) Rate of increase in salaries Rate of increase in pensions in payment Rate of increase in pensions in deferment 2016 % 2.85 3.30 N/A 3.00 3.30 Life Expectancy assumption (number of years from the age of 65) Years Male currently aged 45 Female currently aged 45 Male currently aged 65 Female currently aged 65 ANALYSIS OF AMOUNT CHARGED TO FINANCE COSTS Interest on pension scheme assets Interest on pension scheme liabilities Net finance charge ANALYSIS OF AMOUNT RECOGNISED IN OTHER COMPREHENSIVE EXPENSE (Gains)/losses on pension scheme assets in excess of interest Gains from changes to demographic assumptions Losses from changes to financial assumptions Actuarial loss recognised in other comprehensive expense 24.5 25.8 23.3 24.3 2016 £000 304 (443) (139) 2016 £000 (1,252) (133) 2,577 1,192 2015 % 3.80 3.20 N/A 2.90 3.20 Years 24.7 25.9 23.4 24.4 2015 £000 289 (429) (140) 2015 £000 136 - 203 339 Instem plc Annual Report, 2016 63 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations (continued) CHANGES IN THE PRESENT VALUE OF THE DEFINED BENEFIT OBLIGATION Opening defined benefit obligation Interest cost Benefits paid Changes to demographic assumptions Changes to financial assumptions Closing defined benefit obligation CHANGES IN THE FAIR VALUE OF PLAN ASSETS Opening plan assets Expected return Return on plan assets less interest Contributions by employer Benefits paid Closing plan assets The actual return on plan assets was a positive return of £1.56m (2015: £0.15m). AMOUNT RECOGNISED IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2016 £000 11,782 443 (233) (133) 2,577 14,436 2016 £000 7,849 304 1,252 518 (233) 9,690 2016 £000 2015 £000 11,405 429 (255) - 203 11,782 2015 £000 7,524 289 (136) 427 (255) 7,849 2015 £000 Present value of funded obligations (14,436) (11,782) Fair value of plan assets Deficit Related deferred tax asset Net pension liability RECONCILIATION OF NET DEFINED BENEFIT LIABILITY Opening net defined benefit liability Net interest expense Remeasurements Contributions by employer Closing net defined benefit liability 9,690 (4,746) 807 (3,939) 2016 £000 3,933 139 1,192 (518) 4,746 7,849 (3,933) 707 (3,226) 2015 £000 3,881 140 339 (427) 3,933 64 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations (continued) Cumulative Cumulative ANALYSIS OF CUMULATIVE AMOUNT RECOGNISED IN OTHER COMPREHENSIVE EXPENSE Actual return less expected return on pension scheme assets Experience gains and losses arising on scheme liabilities Changes in demographic assumptions Changes in assumptions underlying the present value of the scheme liabilities 2016 £000 1,362 (1,811) 133 (5,019) Cumulative actuarial loss recognised in other comprehensive expense (5,335) MAJOR CATEGORIES OF PLAN ASSETS AS A PERCENTAGE OF FAIR VALUE OF TOTAL PLAN ASSETS 2016 2015 Equities Property Bonds Corporate Bonds Cash Other £000 6,959 301 1,232 167 424 607 9,690 % 72 3 13 2 4 6 £000 5,664 227 810 672 378 98 100 7,849 100 2015 £000 110 (1,811) - (2,442) (4,143) % 72 3 10 9 5 1 The five-year history of experience adjustments is as follows: 2016 £000 2015 £000 2014 £000 2013 £000 2012 £000 Present value of defined benefit obligation (14,436) (11,782) (11,405) (10,529) (9,200) Fair value of plan assets 9,690 7,849 7,524 7,023 6,004 Deficit (4,746) (3,933) (3,881) (3,506) (3,196) Experience adjustments on plan liabilities Return on plan assets less interest - - (138) - (763) 1,252 (136) (7) 612 172 Instem plc Annual Report, 2016 65 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 23. Retirement Benefit Obligations (continued) The Group expects to contribute £0.5m to its defined benefit plan in the next financial year (2015: £0.4m). The following sensitivities apply to the value placed on the liabilities: Adjustments to assumptions Approximate effect on liabilities £000 DISCOUNT RATE Plus 0.50% pa Minus 0.50% pa INFLATION Plus 0.50% pa Minus 0.50% pa LIFE EXPECTANCY Plus 1 year Minus 1 year (1,313) 1,506 1,424 (1,264) (507) 503 24. Share Capital Allotted, called up and fully paid At 1 January 13,043,774 ordinary shares of 10p each (2015: 12,212,260) 2,727,624 (2015: 831,514) ordinary shares of 10p each, issued during the year At 31 December 2016 £000 1,304 273 1,577 2015 £000 1,221 83 1,304 On 23 February 2016, the Company raised £5.0 million (before expenses) by way of a placing of 2,500,000 new ordinary shares with new and existing investors. The Company issued 86,393 new ordinary shares in respect of part consideration of the acquisition of Samarind Limited. In addition, 141,231 shares were issued during the year in respect of the exercise of share options. 66 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 25. Earnings Per Share Basic and Fully Diluted Basic earnings per share are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option 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. 2016 Weighted average Earnings per Profit after 2015 Weighted average Earnings per number of share (pence) tax (£000) number of share (pence) shares (000’s) shares (000’s) Profit after tax (£000) Earnings per share-Basic 1,058 Potentially dilutive shares - Earnings per share-Diluted 1,058 15,302 324 15,626 6.9 - 6.8 (428) - (428) 12,398 -* 12,398 (3.5) - (3.5) * Dilutive share options have been excluded from the calculation as in accordance with IAS 33, ‘Earnings per share’, as they are only included where the impact is dilutive. Adjusted 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 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. Adjusted profit after tax (£000) Earnings per share-Basic 1,752 Potentially dilutive shares - Earnings per share-Diluted 1,752 2016 Weighted average number of shares (000’s) 15,302 324 15,626 Adjusted earnings per share (pence) Adjusted profit after tax (£000) 11.5 - 11.2 1,644 - 1,644 2015 Weighted average number of shares (000’s) 12,398 337 12,735 Reconciliation of adjusted profit after tax: Reported profit/(loss) after tax Non-recurring (income)/costs Amortisation of acquired intangibles Foreign exchange differences on revaluation of inter-group balances 2016 £000 1,058 (619) 667 646 1,752 Adjusted earnings per share (pence) 13.3 - 12.9 2015 £000 (428) 1,426 640 6 1,644 Instem plc Annual Report, 2016 67 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 26. Capital and Reserves Share capital The share capital account represents the par value for all shares issued. The Company has one class of share and each share rank parri passu and carry equal rights. Share premium account The share premium account is used to record amounts received in excess of the nominal value of shares on issue of new shares less the costs of new share issues. Merger reserve The merger reserve represents the difference between the consideration payable at the date of acquisition, net of merger relief, and the share capital and share premium of Instem Life Science Systems Limited. Shares to be issued The shares to be issued reserve represents the shares to be issued under the share option scheme and shares contingently issuable on acquisitions. Translation reserve The translation reserve incorporates the cumulative net exchange gains and losses recognised on the translation of subsidiary company financial information to the presentational currency of Sterling (£). Retained earnings The retained earnings reserve includes the accumulated profits and losses arising from the consolidated ‘Statement of Comprehensive Income’ and certain items from ‘Other Comprehensive Income’ attributable to equity shareholders net of distributions to shareholders. CAPITAL MANAGEMENT The Group’s main objective when managing capital is to protect returns to shareholders by ensuring the Group will continue to trade profitably in the foreseeable future. The Group also aims to maximise the capital structure of debt and equity so as to minimise its cost of capital. The Group manages its capital with regard to the risks inherent in the business and the sector within which it operates by monitoring its gearing ratio on a regular basis. The Group considers its capital to include share capital, share premium, merger reserve, shares to be issued, translation reserve, retained earnings and net debt as noted below. Net debt includes short and long-term borrowings (including overdrafts and lease obligations) net of cash and cash equivalents. The Group has not made any changes to its capital management during the year. 27. Capital Commitments There were no capital commitments at the end of the financial year (2015: £nil). 68 Instem plc Annual Report, 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 28. Operating Leases Payable Minimum lease payments under operating leases recognised as an expense in the year At the reporting date, the Group has future aggregate minimum lease payments, which fall due as follows: Land and buildings Within one year In the second to fifth year inclusive After five years Plant and machinery Within one year In the second to fifth year inclusive 2016 £000 520 2016 £000 444 778 236 10 13 2015 £000 368 2015 £000 395 748 358 2 3 1,481 1,506 Operating lease payments represent rentals payable by the Group for property leases and certain equipment. Leases have varying terms and renewal rights. The above leasing arrangements do not contain any restrictive covenants, contingent rents or purchase options. The operating leases in relation to office buildings contains a dilapidation clause whereby Instem plc must make good any damage to the demised premises on expiration of the lease. The Directors estimate that the current liability is not material to warrant provision at the period end. No operating leases are held by the Company. Instem plc Annual Report, 2016 69 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 29. Related Party Transactions Transactions between Group companies have not been disclosed as these have all been eliminated in the preparation of the consolidated financial statements. During the year, the Company traded with subsidiary companies in its normal course of business. These transactions related to recharges and totalled in aggregate £0.5m (2015: £0.6m). The net intercompany balances due from the Company at the year-end totalled £1.9m (2015: due from: £1.2m). During the year, the Group traded in its normal course of business with shareholders and consultancy businesses in which Directors have a material interest as follows: Key management compensation: 2016 £000 2015 £000 Fees for services provided as Non-Executive Directors Salaries and short term benefits Post employment retirement benefits Employers’ national insurance & social security costs Share based payment charge Executive Directors Salaries and short term benefits Post employment retirement benefits Employers’ national insurance & social security costs Share based payment charge 82 - 9 - 91 335 40 25 105 505 Other key management Salaries and short term employee benefits 567 Post employment retirement benefits Employers’ national insurance & social security costs Share based payment charge 49 55 84 755 68 - 7 - 75 318 37 21 71 447 508 26 45 57 636 The Company paid £0.05m (2015: £0.05m) to Instem Ventures Limited, a company owned by A Gare, a shareholder. The balance outstanding at the end of the year was £nil (2015: £0.005m). In addition, the Company paid £0.03m (2015: £0.02m) to Noble Adamson Limited, a company owned by M McGoun, an independent non-executive director and a shareholder. The balance outstanding at the end of the year was £0.009m (2015: £0.002m). In November 2016, the Group made a six-month loan of £0.07m to a member of the key management team. Interest is accrued at a rate of 3%. The balance outstanding at the end of the year was £0.07m (2015: £nil). Key management are considered to be the Directors together with the Senior Managers of the business. 30. Contingent Liabilities Instem plc has provided a guarantee to its subsidiaries which have taken advantage of the exemption from audit. Under this guarantee, the company has a contingent liability of £9.0m (2015: £9.0m). 70 Instem plc Annual Report, 2016 NOTES Instem plc Annual Report, 2016 71 NOTES 72 Instem plc Annual Report, 2016 Directors and Advisors DIRECTORS D Gare (Non-Executive Chairman) M F McGoun (Independent Non-Executive) D M Sherwin (Non- Executive) P J Reason N J Goldsmith AUDITOR RSM UK Audit LLP Chartered Accountants 14th Floor Chapel Street Liverpool L3 9AG BANKER National Westminster Bank plc 1 Spinningfields Square Manchester M2 3AP NOMINATED ADVISOR AND BROKER N+1 Singer Advisory LLP One Bartholomew Lane London EC2N 2AX REGISTRARS Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE SOLICITORS Squire Patton Boggs (UK) LLP Trinity Court 16 John Dalton Street Manchester M60 8HS SECRETARY N J Goldsmith REGISTERED OFFICE Diamond Way Stone Business Park Stone Staffordshire ST15 0SD Tel: +44 1785 825600 Fax: +44 1785 825633 www.instem.com Company No: 07148099 Our clients include these fine organisations...  Instem supports over 500 clients through offices in the United States, United Kingdom, France, India, China and Japan. To learn more about Instem solutions and its mission, please visit instem.com UK Global Headquarters UK & European Operations Diamond Way Stone Business Park Stone Staffordshire, ST15 0SD United Kingdom Tel: +44 (0) 1785 825600 USA North American Headquarters Eight Tower Bridge 161 Washington Street Suite 1550, 15th Floor Conshohocken, PA 19428 United States Tel: +1 (610) 941 0990 China Asia-Pacific Headquarters Room 205, Building 16 88 Darwin Road Zhangjiang High-Tech Park, Pudong District Shanghai China, 201203 Tel: +86 (0) 21 5131 2080 e-mail: investors@instem.com investors.instem.com 

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