Instem plc
Annual Report
2017
Instem is a leading provider of IT solutions & services to the
life sciences market delivering compelling solutions for Study
Management and Data Collection; Regulatory Solutions for
Submissions and Compliance; and Informatics-based Insight
Generation.
Instem solutions are in use by over 500 customers worldwide,
including all the largest 25 pharmaceutical companies, enabling
clients to bring life enhancing products to market faster. Instem’s
portfolio of software solutions increases client productivity by
automating study-related processes while offering the unique
ability to generate new knowledge through the extraction and
harmonisation of actionable scientific information.
Instem products and services now address aspects of the
entire drug development value chain, from discovery through
to market launch. Management estimate that over 50% of all
drugs on the market have been through some part of Instem’s
platform at some stage of their development. To learn more
about Instem solutions and its mission, please visit instem.com.
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
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Instem plc Annual Report, 2017
Highlights
Financial Highlights
•
•
•
•
•
•
•
Revenues increased 19% to £21.7m (2016: £18.3m)
•
Recurring revenues increased 9% to £12.8m
(2016: £11.7m)
Software as a Service (SaaS) revenues increased
10% to £4.4m (2016: £4.0m)
•
EBITDA* of £3.0m (2016: £1.3m)
Adjusted** profit before tax of £1.9m (2016: £0.7m)
Reported profit before tax of £0.8m (2016: £0.02m)
Basic earnings per share of 6.9p (2016: 6.9p)
Adjusted** fully diluted earnings per share of 13.8p
(2016: 11.2p)
Net cash balance as at 31 December 2017 of £3.1m
(2016: £4.2m)
Operational Highlights
•
•
•
•
•
•
Appointment of Chief Operating Officer, Ms.
MaryBeth Thompson
Significant amendment to a contract with the US
National Institute of Environmental Health Sciences
(NIEHS)
Successfully completed Group-wide re-organisation
in June 2017 to reduce annualised operational
overheads by approximately £1.5m or 10%, which:
•
helped to significantly improve the Group’s
profitability in the second half of 2017
• will deliver a full year benefit in the current
financial year
Instem’s largest customer brought into operation
over 700 additional Provantis user licenses during
2017, delivering enhanced recurring revenue
Successfully completed the integration of Samarind
& Notocord, acquired in May and September 2016,
respectively, with a solid contribution to overall
revenue for the period
Secured two new Alphadas clients in the second half
of 2017 with a major pharmaceutical company and
an India-based CRO.
Post period Highlights
•
Secured the largest SEND outsourced services
contract win to date with a top five global
nonclinical CRO that plans to outsource all SEND
data set generation to Instem
Instem products and services now address
aspects of the entire drug development value
chain, from discovery through to market
launch, and are currently deployed by over
500 companies, including all of the largest
25 pharmaceutical companies in the world.
Management estimate that over 50% of all
drugs on the market have been through some
part of the Group’s platform at some stage of
their development.
While new software license revenue was
particularly strong in 2017, we also focused
on opportunities to increase SaaS revenues
and were very pleased to deliver an increase
of over 10% during 2017, with both new SaaS
customers and existing clients switching from
on-premise to SaaS deployment.
The current financial year has started
strongly with the largest SEND outsourced
services contract win to date and one of the
world’s largest chemical products companies
converting to the Group’s market leading
SaaS delivery model. These will deliver
increased revenue and improved visibility for
2018 respectively. Furthermore, the recent
restructuring will deliver the full twelve-month
benefit in the current year.
The Board therefore looks forward to the
coming year and beyond with increasing
optimism on the back of an enhanced delivery
platform, which promises to deliver significant
revenue growth, enhanced profitability and
improved quality of earnings.
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, 2017 3
market leadership
“Management estimate that over 50% of all
drugs on the market have been through some
part of the Group’s platform at some stage of their
development.”
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Instem plc Annual Report, 2017
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Chairman’s
Statement
Our priority in 2017 was to establish the platform for
the next stage in the development of the Group, both
operationally and financially. In this regard I am pleased
to report that we believe that both objectives have been
achieved.
Firstly, we have delivered strong financial results with an
EBITDA of £3.0m (2016: £1.3m) and revenues of £21.7m
(2016: £18.3m). This has been achieved in a manner that
has ensured that we have either maintained or improved
our position in all our targeted sectors, with many of our
products already established global market leaders in
their field.
Secondly, and importantly, at the half year we
restructured and rationalised the operations of the
various businesses which had been acquired over recent
years. The efficiencies gained, whilst apparent in the
second half of the year, will be ongoing for 2018 and
beyond. In addition, and whilst not directly impacting
our cost structure in 2017, we also, under the direction
of Jerry Hacker, our SVP of Global sales, changed the
emphasis of our global sales towards ‘portfolio sales’
of our product suite. This was a move from our previous
structure of product sales specialists, which was an initial
and inevitable consequence of the acquisitions we had
made.
These two structural changes not only enhance our
organic development plans, but pave the way for the
integration of potential future acquisitions.
As stated in my half year report in September last year,
we are now operating in all territories appertaining
to the global healthcare research sector. We also now
have leading products, not only in our traditional study
management areas but also in regulatory solutions and
informatics.
Whilst we are continuing to address some remaining
legacy issues in our Clinical business, confidence is
returning with the achievement of two major new contract
wins towards the year end.
During the year, some notable achievements in our
traditional markets were:
•
Significant further commitment from the US National
Institute of Environment Health Sciences (“NIEHS”)
under an existing multi-million-dollar 10-year
contract
•
•
Further growth in our market leadership in Asia-
Pacific, with new clients in China, Japan and South
Korea and successful cross-selling of additional
products to existing clients
Increased adoption in major pharma and CROs of
our new enterprise genetic toxicology solution Cyto
Study Manager (CSM)
• Widespread client implementation of Provantis
version 10, including the world’s largest deployment
of this type of software at 14 global Charles River
Laboratories sites
The 2016 acquisitions, Samarind and Notocord, both
made very positive first full year contributions to the
Group and both are expected to benefit further in 2018
from their access to Instem’s global resources.
Of particular importance during the year was our
substantive move into ‘technology enabled outsourced
services’. This included further consolidating our
dominant market position in the provision of SEND
technology and services. More recently, post year end,
it has been particularly pleasing to see demand for
SEND significantly increase across the industry, further
justifying our strategy for early leadership in this market
segment.
Our facility in Pune, India, will be a key ‘skill centre’ for
this work. Pune has a rich supply of talented staff and a
highly regarded reputation for technically demanding
outsourced services. This makes it an ideal location for
the expansion of our capacity for this type of work.
Finally, and encouragingly, our ‘seed’ informatics
business, based in Cambridge, had a successful year, more
than doubling the number of target safety assessment
(TSA) assignments completed compared to the prior year.
To provide some measure of success the business has had
over recent years, and the scale it now has, management
estimate that over 50% of the drugs on the world market
have now been through some part of the Instem platform
at some stage in their development. This market position,
together with the scalable platform resulting from the
structural changes implemented last year, means that we
believe that the Group is now well positioned to continue
its success in 2018 and beyond.
D Gare
Non-Executive Chairman
Instem plc Annual Report, 2017 5
continued growth
“While new software license revenue was
particularly strong in 2017, we also focused on
opportunities to increase SaaS revenues and were
very pleased to deliver an increase of over 10%
during 2017.”
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Instem plc Annual Report, 2017
Strategic
Report
Strategic Development
The period under review was one of significant
operational change and strategic progress, resulting in
record full year revenue and profitability and a strong
and scalable platform for future growth.
The arrival of our new Chief Operating Officer, MaryBeth
Thompson at the start of the period, provided the
opportunity to trigger the next stage of business
reorganisation and integration. This saw the creation of
centralised areas of excellence for all key operational
functions under a new Operations leadership team,
comprising new hires and existing experienced
managers. The increased senior management team
bandwidth has allowed us to analyse the opportunities,
challenges and threats facing the business and also
provided valuable insights into the Group’s industry
position and future opportunities. The process identified
areas of the business where there was capacity that
could be redeployed or reduced, and enabled a number
of out-sourced activities to be more cost-effectively
delivered in-house using UK and India based resources.
This has all been achieved whilst ensuring the business
remained agile and responsive to the dynamic markets in
which it operates.
The Group successfully completed a Group-wide
re-organisation in June 2017 to reduce annualised
operational overheads by approximately £1.5m or
10%, which helped to significantly improve the Group’s
profitability in the second half of 2017 and will deliver a
full year of benefit in 2018 and beyond.
We believe that Instem is now ‘purpose built’ to deliver
software and services which address three distinct, but
complementary, value propositions:
1. Study Management and Data Collection - efficiently
capture, analyse and report scientific study data
2.
Informatics - generate new insights from existing
large data sets through the application of
sophisticated big data aggregation and analytics
3. Regulatory Solutions - help clients ensure
compliance with global regulators such as the
FDA and EMA from the early stage of product
development, through an approved product’s entire
commercial life
Revenue growth and profit contribution occurred in all of
these areas of the business and each enhanced its market
position during the year.
Instem products and services now address aspects of
the entire drug development value chain, from discovery
through to market launch and ongoing regulated product
lifetime management. They are currently deployed by
over 500 companies, including all of the largest 25
pharmaceutical companies in the world.
During the period Instem continued to win the majority
of new business placed in nonclinical, our largest market,
for both data collection and regulatory solutions, with
strong year over year revenue growth in both early phase
clinical and informatics.
While new software license business was particularly
strong in 2017, we also focused on opportunities to
increase SaaS revenue and were very pleased to see
this increase over 10% during 2017 with both new
SaaS customers and existing clients switching from
on-premise to SaaS deployment.
Study Management and Data Collection
The global market demand for software that ensures the
efficient capture, management and reporting of scientific
force. We are also well-placed to support medical device
businesses as they implement FDA Unique Device
Identification (“UDI”) requirements in the USA and start
Instem plc Annual Report, 2017 7
STRATEGIC REPORT
study data remains robust as the number of compounds
in Research and Development continues to increase.
According to a recent report from Informa’s Pharma
Intelligence, a leading industry and market analysis firm,
the number of compounds in the Global R&D Pipeline
increased by 2.7% to 15,267 in 2018, its highest ever
number. We believe that this is due to a number of
factors, but the overall trend is largely underpinned
by global population growth and from increasing life
expectancy, which is unlikely to change over the near-
term.
Importantly, the number of compounds in the R&D
Pipeline within preclinical and Phase I trials, where
Instem specialises, has increased year on year by 7.3%
and 3.0% respectively, indicating a growing potential
for the Group’s products and services within these
market segments.
The Group is particularly pleased to report that its
contract with the NIEHS has progressed well since it was
first announced in 2013. As anticipated, this 10-year
contract for the capture, recording and analysis of
preclinical safety evaluation study data has expanded
in scope since commencement, with the number of
locations and the number of authorised users both
increasing over the period, further demonstrating the
increasing value of the Group’s software and services to
the NIEHS.
Our largest customer also brought into operation over
700 additional Provantis user licenses during 2017,
triggering enhanced recurring revenue.
Assisted by our mid-2017 restructuring, significant
software development investment continues to be made
in Alphadas to ensure that we fully satisfy existing client
needs and continue to secure a sizeable market share
in a competitive market. We were particularly pleased
to secure two new Alphadas clients in the second half
of 2017, a major pharmaceutical company and an India
based CRO, which we anticipate being an important
reference client in a region with several potential
additional clients.
Informatics
The KnowledgeScan™ informatics-based service
was formally launched by the Group in 2016 and has
developed well in 2017. It offers the pharmaceutical
industry insightful new ways to create value from huge
volumes of public and proprietary scientific health-
related data to reduce the risk and cost of bringing new
drugs to market.
The initial application of KnowledgeScan™ is for
Target Safety Assessment (“TSA”), a process routinely
undertaken at the earlier stages of drug discovery, but
with continuing value throughout the drug development
process. Business volume has more than doubled in
2017, reaching production capacity in most months.
We have added some resource and TSA capacity has
been further increased through process automation.
Repeat business remains encouraging with over 80% of
customers having already placed additional orders.
Regulatory Solutions
Regulatory Solutions represent a growing market
opportunity for Instem with a broad target market
in Regulatory Information Management (“RIM”)
and growing demand for our regulatory submission
related products and services that implement the FDA
mandated Standard for the Exchange of Nonclinical
Data.
Regulatory Information Management
Our Samarind RMS RIM product made an excellent first
full year contribution, with solid recurring revenue
and the addition of some new client wins. These new
business orders were received in four niche sectors of
the RIM market, where we see further opportunity for
Instem, and were for:
•
•
•
•
One of the world’s top 10 medical device
businesses, for the entire Samarind RMS suite
A leading generic medicines supplier
A veterinary health products provider
A European specialist pharma company
Our genetic toxicology solutions continue to dominate
their market and following the release of our new
Cyto Study Manager solution, we made new sales into
existing Instem key pharma and CRO accounts.
The new business sales function was fully integrated
into our global sales department in 2017, bringing
additional resources and a consistent sales process and
management.
The Notocord business acquired in September 2016
has integrated well and has made a solid contribution
during the period. Of particular note was a large
order for the U.S. Army Medical Research Institute
of Infectious Diseases, however the majority of new
business generated in this area was from a large number
of contracts; generally additional modules for existing
clients, averaging less than £15,000 each.
The industry and regulatory initiative to implement
an internationally harmonised standard for the
Identification of Medicinal Products (“IDMP”) has
been delayed by several years, while the working
groups finalise the details of the standard and how
to successfully roll it out. However, it remains of keen
interest to our current customers and prospects. We
remain confident, given our leadership in implementing
the current European standard, that we are well-placed
to execute on this initiative as and when it comes
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Instem plc Annual Report, 2017
FDA request for test data, supporting the development
of the next version of the standard.
Summary and Outlook
Instem products and services now address aspects of
the entire drug development value chain, from discovery
through to market launch, and are currently deployed
by over 500 companies, including all of the largest 25
pharmaceutical companies in the world. Management
estimate that over 50% of all drugs on the market have
been through some part of the Group’s platform at some
stage of their development.
While new software license revenue was particularly
strong in 2017, we also focused on opportunities to
increase SaaS revenues and were very pleased to deliver
an increase of over 10% during 2017, with both new
SaaS customers and existing clients switching from
on-premise to SaaS deployment.
The current financial year has started strongly with
the largest SEND outsourced services contract win to
date and one of the world’s largest chemical products
companies converting to the Group’s market leading
SaaS delivery model. These will deliver increased
revenue and improved visibility for 2018 respectively.
Furthermore, the recent restructuring will deliver the
full twelve-month benefit in the current year.
The Board therefore looks forward to the coming year
and beyond with increasing optimism on the back of an
enhanced delivery platform, which promises to deliver
significant revenue growth, enhanced profitability and
improved quality of earnings.
On behalf of the Board
P J Reason
Chief Executive
23 April 2018
STRATEGIC REPORT
into the process of responding to the new Medical
Device Regulations (“MDR”) and In-vitro Diagnostics
Regulations (“IVDR”) that are being rolled out in Europe.
Standard for the Exchange of Nonclinical Data (“SEND”)
Based on historic regulatory submission volumes,
Instem anticipates that, to meet mandated FDA
submission requirements, SEND related market
expenditure will increase from approximately $10m in
2016 to around $130m in 2020. As Instem is currently
the leading provider of SEND software products and
technology enabled outsourced services this represents
a significant growth opportunity.
Instem continues to dominate the SEND technology
market, with software sales during the period
predominantly focused on our modules for viewing
and exploring SEND datasets. With the first regulatory
mandate coming into force in December 2016, those
companies who hadn’t already equipped themselves
with the technology to create SEND datasets are now
predominantly looking for out-sourced service providers
for SEND creation. Whilst we have won the majority
of out-sourced services contracts, many clients were
initially slow to provide data for conversion, however
this picked up during the second half of 2017 and has
accelerated further in the first quarter of 2018.
During 2017, enquiries for the Group’s SEND software
solutions and its outsourcing services in particular,
continued to increase, as the next major milestone
of the SEND mandate came into effect in December
2017. This mandate covers shorter duration studies
that are undertaken in much greater volume, to tighter
deadlines. As expected, it has generated a significant
increase in SEND conversion demand.
Instem now has a total of 92 customers that have
procured the Group’s SEND technology and/or
out-sourced services, which includes nine of the top
10 preclinical CROs and 20 of the world’s top 25 global
pharmaceutical companies. Established SEND-related
client relationships are expected to be a significant
source of future business as the volume of out-sourced
services increases.
During 2017, the Group introduced a new software
module, SENDTrial™, that will deliver significant
efficiencies for clients (and our internal Services team)
by reducing processing time in one specific area by
up to 80%. This product is the first of its type on the
market and offers a solution which can be deployed
alongside Instem’s existing submit™ products, or used
independently. SENDTrial™ will create additional
opportunities for Instem as those companies that are
currently running competing systems cannot efficiently
meet these specific requirements.
In addition, Instem has released an updated version of
our submit™ software that enables clients to satisfy an
Instem plc Annual Report, 2017 9
outlook
“The current financial year has started strongly
with the largest SEND outsourced services
contract win to date and one of the world’s largest
chemical products companies converting to the
Group’s market leading SaaS delivery model.“
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Instem plc Annual Report, 2017
Financial
Review
Instem’s revenue model consists of perpetual licence
income with annual support contracts, professional
and technology enabled outsourced services fees, and
SaaS subscriptions with annual support contracts. Total
revenue for the year to 31 December 2017 increased by
19% to £21.7m (2016: £18.3m). This increase includes
the impact of full year revenues from the prior year
acquisitions of £2.5m 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 annual support fees relating to
these subscriptions increased by 9% to £12.8m (2016:
£11.7m), representing 59% of total revenue (2016:
64%). This includes recurring revenue generated from
our 2016 acquisitions of £1.7m (2016: £0.8m).
Another key performance indicator of the Group is the
number and quality of customers. In 2017 the Group
had in excess of 500 customers (2016: in excess of 500
customers) for continuing products including all of the
largest 25 pharmaceutical companies in the world.
Earnings before interest, tax, depreciation and
amortisation and non-recurring items for the year was
£3.0m (2016: £1.3m).
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 £1.9m (2016: £0.7m). The unadjusted
profit before tax for the year was £0.8m (2016: £0.02m).
The non-recurring items in the year included £0.6m
in respect of the restructuring costs relating to the
redundancy and legal costs connected with the Group’s
business reorganisation implemented in the first half of
2017, together with a cost provision relating to historical
contract disputes. The non-recurring items also
included income of £0.2m in respect of an amendment to
the deferred contingent consideration payable in respect
of the Notocord acquisition.
Development costs incurred during the year were
£3.3m (2016: £2.6m), of which £1.4m (2016: £0.8m)
was capitalised. The Group claimed research and
development tax credits in respect of 2017 of £0.6m
(2016: £0.4m)
Basic and fully diluted earnings per share calculated on
an adjusted basis were 14.1p and 13.8p respectively
(2016: 11.5p basic and 11.2p diluted).
The Group generated net cash from operating activities
of £1.4m (2016: £0.1m). The Group had net cash
reserves of £3.1m at 31 December 2017, compared with
£4.2m as at 31 December 2016. The Group paid £0.7m
in respect of deferred consideration during the year and
continued to invest in the software products developed
by the Group. There is one final deferred consideration
amount of £0.2m within Current Financial Liabilities in
respect of prior year acquisitions, which is payable in the
first half of 2018.
The Group’s legacy defined benefit pension scheme
has remained closed to new members since 2000 and
to future accrual since 2008. It experienced a decrease
in the funding deficit during the year, calculated in
accordance with the provisions of IAS19, that amounted
to £0.8m (net of deferred tax) (2016: increase in funding
deficit £0.7m) due to gains on the pension scheme
Instem plc Annual Report, 2017 11
FINANCIAL REVIEW
assets in excess of interest. This is mainly a non-cash
credit and was recognised in Other Comprehensive
Income/(Expense). The overall deficit at the year-end
stood at £3.8m (2016: £4.7m), represented by the
fair value of assets of £10.8m (2016: £9.7m) and the
present value of funded obligations of £14.6m (2016:
£14.4m). 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 designed
to eliminate the funding deficit by November 2023.
The next triennial valuation will be calculated as at 5
April 2017, the results of which will be reported in the
Group’s 2018 Interim financial statements.
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 has identified the risk of cyber security and
breach of information as a principal risk. The Group
mitigates against this risk with compliance to ISO 27001
certified processes, strong IT controls and specific cyber
insurance.
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 2017, its £2.0m bank facility was undrawn
(2016: £2.0m undrawn).
N J Goldsmith
Chief Financial Officer
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Instem plc Annual Report, 2017
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, 2017 13
s
t
r
o
p
e
r
14
Instem plc Annual Report, 2017
CORPORATE GOVERNANCE STATEMENT
CORPORATE GOVERNANCE STATEMENT
Audit Committee
Given the size of the Group the Board has decided to follow
the code issued by the Quoted Companies Alliance 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:
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.
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.
c.
d.
e.
f.
g.
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
10/10
10/10
10/10
10/10
10/10
2/2
2/2
2/2
2/2
2/2
4/4
1/1
4/4
4/4
4/4
0/0
0/0
1/1
1/1
1/1
Instem plc Annual Report, 2017 15
CORPORATE GOVERNANCE STATEMENT
Audit Committee (continued)
The Audit Committee is authorised to:
a.
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.
b.
c.
Remuneration Committee
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.
b.
c.
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;
d. demonstrates to the Group’s shareholders that the
remuneration of the executive directors is set by an
independent committee of the Board; and
considers and makes recommendations to the
Board about the public disclosure of information
about the executive directors’ remuneration
e.
16
Instem plc Annual Report, 2017
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.
The Remuneration 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;
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;
is responsible for identifying and nominating for
the approval of the Board, candidates to fill Board
vacancies as and when they arise; and
c.
CORPORATE GOVERNANCE STATEMENT
Nomination Committee (continued)
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.
On behalf of the Board
M F McGoun
Independent Non-Executive Director
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.
The Nomination Committee is authorised to:
a.
b.
c.
d.
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
instruct external professional advisors to attend
any meeting at the Group’s expense if the
Nomination Committee considers this reasonably
necessary and appropriate.
Instem plc Annual Report, 2017 17
DIRECTORS’ REPORT
DIRECTORS’ REPORT
Directors
The directors submit their report and the Group and
Company financial statements of Instem plc for the year
ended 31 December 2017.
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
life sciences 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.
Review of the Business
A 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.
Future Developments
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.
The following directors held office during the year:
D Gare
M F McGoun
D M Sherwin
P J Reason
N J Goldsmith
Details of the directors’ service contracts and their
respective notice terms are detailed in the Directors’
Remuneration report on pages 20 and 21.
Directors and their Interests
The interests of the directors who held office at 31
December 2017 and up to the date of this report (2016:
as at 12 April 2017) were as follows:
No. of Shares
2017
2016
D Gare
1,258,427
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
-
-
Directors’ interests in share options are detailed in the
Remuneration report on pages 20 and 21.
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
Research and Development Activities
The Group made no political donations in 2017 or 2016.
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.
Financial Instruments
The Group’s objectives and policies on financial
instruments are set out in note 20 to the financial
statements.
Indemnity of Officers and Directors
Dividends
The directors do not recommend the payment of a
dividend.
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
18
Instem plc Annual Report, 2017
DIRECTORS’ REPORT
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 24 May 2018 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.
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
23 April 2018
Instem plc Annual Report, 2017 19
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION REPORT
Performance Related Annual Bonus
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 £nil
were payable to executive directors in respect of the
year ended 31 December 2017 (2016: £0.02m).
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.
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.
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 four 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.
Policy on Executive Director
Remuneration
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, 2017
DIRECTORS’ REMUNERATION REPORT
The emoluments paid or payable to directors in respect of the year ended 31 December 2017 were as follows:
Salary and Bonus
£000
Benefits
£000
Pension
£000
2017 Total
£000
2016 Total
£000
Executives
P J Reason*
N J Goldsmith
Non-executives
D Gare
D M Sherwin
M F McGoun
210
116
60
30
30
Total
446
7
7
-
-
-
14
29
11
-
-
-
40
246
134
60
30
30
500
241
134
52
30
30
487
* The remuneration in respect of P J Reason is payable in US Dollars and translated at the average rates as disclosed on page 34.
Directors’ and Employees’ Share Options
Exercise
price (£)
Issue date
Held at 31
Dec 2016
Granted
during Year
Exercised
during Year
Lapsed
during Year
Held at 31
Dec 2017
P J Reason
Ordinary
shares
N J Goldsmith
Ordinary
shares
Employees
Ordinary
shares
1.750
0.900
0.100
2.215
1.760
0.900
0.100
1.750
2.220
2.220
1.115
0.900
0.100
0.100
0.100
0.100
0.100
0.100
13/10/2010
14/01/2013
29/07/2015
187,427
23,429
112,500
29/11/2011
07/02/2012
14/01/2013
29/07/2015
13/10/2010
03/03/2011
17/10/2011
23/10/2012
14/01/2013
11/02/2015
29/07/2015
21/11/2015
27/05/2016
19/09/2016
03/05/2017
40,000
20,000
15,000
75,000
253,026
93,844
14,667
21,500
49,800
40,584
150,000
25,258
34,558
52,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,000
-
-
-
-
-
-
-
-
-
-
(21,500)
(5,154)
-
-
-
-
-
-
-
-
(18,750)
-
-
-
(12,500)
-
-
-
-
-
-
(25,000)
-
(12,959)
(30,000)
(5,000)
187,427
23,429
93,750
304,606
40,000
20,000
15,000
62,500
137,500
253,026
93,844
14,667
-
44,646
40,584
125,000
25,258
21,599
22,500
15,000
656,124
Total
1,209,093
20,000
(26,654)
(104,209)
1,098,230
Subsequent to the year end, on 22 February 2018, 400,000 share options were granted to directors and employees.
Approved by the Board and signed on its behalf by:
M F McGoun
Independent Non-Executive Director
Instem plc Annual Report, 2017 21
DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
The directors are responsible for the maintenance and
22
Instem plc Annual Report, 2017
INDEPENDENT AUDITOR’S REPORT to the members Of instem plc
INDEPENDENT AUDITOR’S REPORT TO
THE MEMBERS OF INSTEM PLC
Opinion
We have audited the financial statements of Instem plc
(the ‘parent company’) and its subsidiaries (the ‘group’)
for the year ended 31 December 2017 which comprise
the Consolidated Statement of Comprehensive Income,
Consolidated Statement of Financial Position, Company
Statement of Financial Position, Consolidated Statement
of Cashflows, Company Statement of Cashflows,
Consolidated Statement of Changes in Equity, Company
Statement of Changes in Equity, and notes to the
financial statements, including a summary of significant
accounting policies. 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 of the parent
company’s affairs as at 31 December 2017 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 company financial statements have
been properly prepared in accordance with IFRSs as
adopted by the European Union and as applied in
accordance with the provisions of the Companies
Act 2006; and
the financial statements have been prepared
in accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are
further described in the Auditor’s responsibilities for
the audit of the financial statements section of our
report. We are independent of the group and parent
company in accordance with the ethical requirements
that are relevant to our audit of the financial statements
in the UK, including the FRC’s Ethical Standard as
applied to SME listed entities and we have fulfilled our
other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a
basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following
matters in relation to which the ISAs (UK) require us to
report to you where:
•
•
the directors’ use of the going concern basis of
accounting in the preparation of the financial
statements is not appropriate; or
the directors have not disclosed in the financial
statements any identified material uncertainties
that may cast significant doubt about the group’s or
the parent company’s ability to continue to adopt
the going concern basis of accounting for a period
of at least twelve months from the date when the
financial statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our
professional judgment, were of most significance in
our audit of the financial statements of the current
period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) we
identified, including those which had the greatest effect
on the overall audit strategy, the allocation of resources
in the audit and directing the efforts of the engagement
team. These matters were addressed in the context of
our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a
separate opinion on these matters.
Revenue recognition
Refer to page 33 regarding the accounting policy in
respect of revenue recognition and note 1 to the financial
statements on page 38.
The risk
Appropriate and accurate income recognition is required
to be applied by the Directors to ensure that revenue
is recognised in accordance with IAS 18 Revenue
within the financial statements. There is a risk that
revenue could be inappropriately recognised based
on the differing recognition policies for product type.
In the year to 31 December 2017 revenue recognised
amounted to £21.7m (2016: £18.3m).
Our response
We have conducted audit work on each revenue stream,
tested a sample of customer revenues back to signed
agreements and accounting standards for the revenue
stream, and performed additional cut-off testing on
key revenue streams in order to identify any areas of
material misstatement. We have also reviewed the
treatment of new or revised contracts alongside the
requirements of IAS 18.
Provisions
Refer to page 36 regarding the accounting policy in
respect of provisions, page 37 in respect of critical
judgements and estimates applied by the Directors and
note 23 on page 64.
Instem plc Annual Report, 2017 23
INDEPENDENT AUDITOR’S REPORT to the members Of instem plc
The risk
The directors are required to apply the requirements of
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets within the financial statements. There is a risk
that the judgement in recognising the provision made
by management in respect of any such provisions do not
fulfil the recognition criteria, furthermore estimation
is required by management for the value at the period
end. At 31 December 2017 provisions amounting to
£0.25m (2016: £nil) have been recognised.
Our response
We have obtained all communications in respect of
items provided including legal correspondence obtained
by the board. We have challenged the appropriateness
of advice relied upon by Instem plc including
considerations of the qualifications of their legal
advisors. Where assumptions have been made by the
groups legal advisors received based on representations
made by the Board we have challenged these and
obtained support. We have audited the underlying basis
for the estimates made by management at the year end
and have assessed its recognition against the accounting
standards criteria.
Carrying value of Company investments
Refer to page 36 regarding the accounting policy in
respect of investments, page 37 in respect of critical
judgements and estimates applied by the Directors and
note 11 on page 46.
The risk
The Company has material investments in subsidiary
undertakings which may not be supported by their
trading levels. As a consequence, there is a significant
risk that these are impaired and need to be written
down. At the 31 December 2017, the carrying value of
these investments amounted to £28.7m (2016: £28.4m)
in the Company Statement of Financial Position.
Our response
We identified investments in each subsidiary
undertaking and discussed with management whether
each balance was supportable taking into account the
strategic plans established by the board in respect
of each subsidiary undertaking. We also obtained
management’s impairment review and underlying
calculations prepared to support the carrying value of
the investments. We reviewed forecasts and considered
whether they were consistent with the forecasts
prepared by management in relation to going concern.
In addition, we reviewed the assumptions utilised in the
model and agreed a sample of these back to supporting
information.
Our application of materiality
When establishing our overall audit strategy, we set
certain thresholds which help us to determine the
nature, timing and extent of our audit procedures and to
evaluate the effects of misstatements, both individually
and on the financial statements as a whole. During
planning we determined a magnitude of uncorrected
misstatements that we judge would be material for the
financial statements as a whole (FSM). During planning
FSM was calculated as £235,000, this was changed
during the course of our audit to £311,000. We agreed
with the Audit Committee that we would report to them
all unadjusted differences in excess of £2,500, as well
as differences below those thresholds that, in our view,
warranted reporting on qualitative grounds.
An overview of the scope of our audit
Eight of the Group’s components were subject to
full scope audit procedures for group and statutory
reporting purposes. We did not rely on the work of
any component auditors. As part of our planning we
assessed the risk of material misstatement including
those that required significant auditor consideration at
the component and group level. Procedures were then
performed to address the risk identified and for the
most significant assessed risks of material misstatement,
the procedures performed are outlined above in the key
audit matters section of this report.
Other information
The directors are responsible for the other information.
The other information comprises the information
included in the annual report, other than the financial
statements and our auditor’s report thereon. Our
opinion on the financial statements does not cover the
other information and, except to the extent otherwise
explicitly stated in our report, we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial statements,
our responsibility is to read the other information and,
in doing so, consider whether the other information is
materially inconsistent with the financial statements
or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify
such material inconsistencies or apparent material
misstatements, we are required to determine whether
there is a material misstatement in the financial
statements or a material misstatement of the other
information. If, based on the work we have performed,
we conclude that there is a material misstatement of
this other information, we are required to report that
fact. We have nothing to report in this regard.
24
Instem plc Annual Report, 2017
INDEPENDENT AUDITOR’S REPORT to the members Of instem plc
Opinions on other matters prescribed by
the Companies Act 2006
Auditor’s responsibilities for the audit of
the financial statements
In our opinion, based on the work undertaken in the
course of the audit:
•
•
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
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
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole
are free from material misstatement, whether due
to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate,
they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
financial statements.
In the light of the knowledge and understanding of the
group and the parent company and their environment
obtained in the course of the audit, we have not
identified material misstatements in the Strategic
Report or the Directors’ Report.
A further description of our responsibilities for the audit
of the financial statements is located on the Financial
Reporting Council’s website at: http://www.frc.org.uk/
auditorsresponsibilities. This description forms part of
our auditor’s report.
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
Chartered Accountants
14th Floor
Chapel Street
Liverpool
L3 9AG
24 April 2018
We have nothing to report in respect of the following
matters in relation to which 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.
Responsibilities of directors
As explained more fully 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, and for such internal control as
the directors determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group’s and the parent
company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting
unless the directors either intend to liquidate the group
or the parent company or to cease operations, or have
no realistic alternative but to do so.
Instem plc Annual Report, 2017 25
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2017
CONTINUING OPERATIONS
Note
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 (COSTS)/INCOME
Non-recurring (costs)/income
PROFIT AFTER NON-RECURRING (COSTS)/INCOME AND BEFORE FINANCE
INCOME/(COSTS)
Finance income
Finance costs
PROFIT BEFORE TAXATION
Taxation
PROFIT FOR THE YEAR
OTHER COMPREHENSIVE INCOME/(EXPENSE)
Items that will not be reclassified to profit and loss account:
Actuarial gain/(loss) on retirement benefit obligations
Deferred tax on actuarial (gain)/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 FOR THE YEAR
PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT
COMPANY
Earnings per share from continuing operations
attributable to owners of the parent company:
Basic
Diluted
25
25
Year ended
31 December
2017
£000
Year ended
31 December
2016
£000
21,668
(18,549)
18,319
(16,843)
(157)
2,962
(186)
(931)
(473)
1,372
(443)
929
186
(318)
797
297
1,094
664
(113)
551
(565)
(14)
1,080
1,094
1,080
6.9p
6.8p
(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
26
Instem plc Annual Report, 2017
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2017
Note
£000
£000
£000
£000
2017
2016
ASSETS
NON-CURRENT ASSETS
Intangible assets
Property, plant and equipment
Deferred tax assets
TOTAL NON-CURRENT ASSETS
CURRENT ASSETS
Inventories
Trade and other receivables
Current tax receivable
Financial asset
Cash and cash equivalents
TOTAL CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
10
12
21
13
14
18
15
16
Trade and other payables
17
Deferred income
Current tax payable
Financial liabilities
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Financial liabilities
Retirement benefit obligations
Provision for liabilities and charges
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Merger reserve
Shares to be issued
Translation reserve
Retained earnings
18
19
19
22
23
24
26
26
26
26
26
17,440
299
300
29
9,470
1,267
-
3,064
2,777
10,370
226
220
51
3,750
250
1,589
12,488
1,598
794
483
(2,727)
17,607
374
947
18,039
18,928
13,830
31,869
916
6,899
-
10
4,189
2,670
9,092
429
979
12,014
30,942
13,593
13,170
4,051
17,644
4,988
18,158
242
4,746
-
1,577
12,462
1,432
864
1,048
(4,599)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
TOTAL EQUITY AND LIABILITIES
14,225
31,869
12,784
30,942
The financial statements on pages 26 to 68 were approved by the board of directors and authorised for issue on 23 April 2018
and are signed on its behalf by:
P J Reason
Director
N J Goldsmith
Director
Instem plc Annual Report, 2017 27
COMPANY STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2017
Note
2017
2016
ASSETS
£000
£000
£000
£000
NON-CURRENT ASSETS
Investments
11
28,711
28,426
TOTAL NON-CURRENT ASSETS
28,711
28,426
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
14
15
16
17
19
2,246
-
1,036
3,876
188
3,282
31,993
2,301
10
2,221
4,332
950
4,532
32,958
4,064
5,282
Financial liabilities
19
-
158
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Merger reserve
Shares to be issued
Retained earnings
24
26
26
26
26
1,589
12,488
13,232
794
(174)
-
4,064
158
5,440
1,577
12,462
13,066
864
(451)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
TOTAL EQUITY AND LIABILITIES
27,929
31,993
27,518
32,958
The Company’s profit for the year and total comprehensive income for the year was £50,000 (2016: £744,000).
The financial statements on pages 26 to 68 were approved by the board of directors and authorised for issue on 23 April 2018
and are signed on its behalf by:
P J Reason
Director
N J Goldsmith
Director
28
Instem plc Annual Report, 2017
CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2017
2017
2016
Note
£000
£000
£000
£000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before taxation
797
Adjustments for:
Depreciation
Loss on disposal of property, plant and equipment
Amortisation of intangibles
Share based payment
Retirement benefit obligations
Finance income
Finance costs
Decrease in deferred contingent consideration
CASH FLOWS FROM OPERATIONS BEFORE MOVEMENTS IN
WORKING CAPITAL
Movements in working capital:
Decrease in inventories
Increase in trade and other receivables
Increase in trade, other payables and deferred income
CASH GENERATED FROM OPERATIONS
Finance income
Finance costs
Income taxes
186
-
1,404
157
(461)
(186)
318
(148)
700
(3,043)
1,808
186
(112)
(214)
NET CASH GENERATED FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of intangible assets
(1,517)
Purchase of property, plant and equipment
Payment of deferred contingent consideration
Repayment of capital of finance leases
Purchase of subsidiary undertakings
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
Finance lease interest
(117)
(687)
(30)
-
29
(6)
23
156
2
1,047
223
(518)
-
646
(1,017)
2,067
562
(535)
1,532
(140)
1,392
85
647
(520)
127
12
(1,737)
1,810
-
(379)
(141)
(890)
(113)
-
(32)
(2,348)
(2,351)
(3,383)
4,823
(8)
NET CASH GENERATED FROM FINANCING ACTIVITIES
NET (DECREASE)/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
16
23
(936)
4,189
(189)
3,064
4,815
1,559
2,183
447
4,189
Instem plc Annual Report, 2017 29
COMPANY STATEMENT OF CASH FLOWS for the year ended 31 December 2017
Note
£000
£000
£000
£000
2017
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before taxation
Adjustments for:
Finance income
Finance cost
Decrease in deferred contingent consideration
CASH FLOWS FROM/(USED IN) OPERATIONS
BEFORE MOVEMENTS IN WORKING CAPITAL
Movements in working capital:
Decrease in trade and other receivables
(Decrease)/increase in trade and other payables
NET CASH (USED IN)/GENERATED FROM
OPERATIONS
Finance costs
NET CASH (USED IN)/GENERATED FROM
OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received
Purchase of subsidiary undertakings
Payment of deferred consideration
50
-
150
(148)
-
-
(687)
52
55
(573)
(466)
(61)
(527)
744
(18)
129
(1,017)
9
(3,289)
-
(162)
320
496
654
-
654
NET CASH USED IN INVESTING ACTIVITIES
(687)
(3,280)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
29
4,823
NET CASH GENERATED FROM FINANCING
ACTIVITIES
NET (DECREASE)/ INCREASE IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at start of year
CASH AND CASH EQUIVALENTS AT END OF YEAR
16
29
(1,185)
2,221
1,036
4,823
2,197
24
2,221
30
Instem plc Annual Report, 2017
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY
Share
capital
£000
Balance as at 1 January 2016
1,304
Shares to
Translation
Retained
be issued
reserve
earnings
£000
£000
Share
premium
£000
7,903
Merger
reserve
£000
1,241
-
-
-
4,559
-
-
-
-
191
-
-
-
-
273
-
1,577
12,462
1,432
-
-
-
12
-
-
-
-
-
26
-
-
-
-
-
166
-
-
£000
641
-
-
-
-
223
864
-
-
-
-
157
(227)
Total
equity
£000
6,613
1,058
(4,680)
1,058
(977)
(133)
81
-
-
925
5,023
223
204
-
844
844
-
-
1,048
(4,599)
12,784
-
1,094
1,094
(565)
(565)
-
-
-
551
(14)
1,645
1,080
-
-
227
204
157
-
1,589
12,488
1,598
794
483
(2,727)
14,225
Profit for the year
Other comprehensive income/
(expense) for the year
Total comprehensive income
Shares issued
Share based payment
Balance as at 31 December
2016
Profit for the year
Other comprehensive
(expense)/income for the year
Total comprehensive income
Shares issued
Share based payment
Reserve transfer on lapse of
share options
Balance as at 31 December
2017
COMPANY STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY
Share
capital
£000
Balance as at 1 January 2016
1,304
Profit for the year
Shares issued
Share based payment
-
273
-
Share
premium
£000
7,903
-
4,559
-
Merger
reserve
£000
12,875
-
191
-
Balance as at 31 December 2016
1,577
12,462
13,066
Profit for the year
Shares issued
Share based payment
Reserve transfer on lapse of share options
-
12
-
-
-
26
-
-
-
166
-
-
Balance as at 31 December 2017
1,589
12,488
13,232
Shares to
be issued
£000
641
-
-
223
864
-
-
157
(227)
794
Retained
earnings
£000
Total
equity
£000
(1,195)
21,528
744
-
-
744
5,023
223
(451)
27,518
50
-
-
227
50
204
157
-
(174)
27,929
Instem plc Annual Report, 2017 31
accounting policies
GENERAL INFORMATION
The principal activity and nature of operations of the Group
is the provision of world class IT solutions to the life sciences
market. Instem’s solutions for data collection, management and
analysis are used by customers worldwide to meet the needs of
life science and healthcare organisations for data-driven decision
making leading to safer, more effective products. Instem plc
is a public limited company, listed on AIM, and incorporated
in England and Wales under the Companies Act 2006 and
domiciled in England and Wales. The registered office is
Diamond Way, Stone Business Park, Stone, Staffordshire, ST15
0SD.
STATEMENT OF COMPLIANCE
The financial 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 two of its subsidiaries Instem Life Science Systems
Limited (company number 04339129) and Instem Scientific
Solutions Limited (company number 03598020), by virtue of
s479A of Companies Act 2006. The Company has provided
parent guarantees to these two 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 £0.05m (2016:
£0.74m).
The accounting policies set out below have, unless otherwise
stated, been applied consistently to all years presented in these
consolidated financial statements.
The definition of recurring revenues has been amended in
these financial statements in comparison to the 2016 financial
statements. The recurring revenues disclosed in the prior year
were annual support and maintenance fees together with the
SaaS subscription and related annual support fees together
with other recurring professional services. In these financial
statements the other recurring professional services have been
excluded from the recurring revenue calculation. The 2017 and
2016 comparative disclosures in these financial statements are
calculated on a consistent basis.
The definition of the revenue type of SaaS has been expanded
in these financial statements in comparison to the 2016
financial statements. The SaaS revenue disclosed in the prior
year reflected the SaaS subscription fees. In these financial
statements the annual support and maintenance revenues in
relation to SaaS customers has also been included in addition
to the subscription fees. The 2017 and 2016 comparative
disclosures in these financial statements are calculated on a
consistent basis.
It is the opinion of the directors that the above changes are
considered more appropriate to better reflect the performance of
the Group.
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate those of the
parent company, Instem plc, and its subsidiary undertakings
made up to 31 December 2017 and 31 December 2016.
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 £10.6m at 31
December 2017 (2016: £7.9m). The deferred income recurs
32
Instem plc Annual Report, 2017
accounting policies
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 working
capital facility of £2.0m which was undrawn at 31 December
2017.
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, outsourced services, 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.
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, finance costs
and taxation, 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)
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)
Instem plc Annual Report, 2017 33
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 2016
1.3553
10.5210
Closing rate at 31 December 2016
1.2340
9.5654
Average rate for year ended 31 December 2017
1.2886
10.0426
Closing rate at 31 December 2017
1.3513
10.5678
Chinese
Renminbi
(RMB)
9.0102
8.5978
8.7036
8.7931
Indian Rupee
(INR)
Japanese
Yen (JPY)
91.0666
147.577
83.4892
144.503
83.8497
144.493
Euro
(EUR)
1.2242
1.1731
1.1416
86.2715
152.231
1.126
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).
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.
FINANCE COSTS
Net finance costs include interest payable, arrangement and
service fees, 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.
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.
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
34
Instem plc Annual Report, 2017
accounting policies
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.
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.
Instem plc Annual Report, 2017 35
accounting policies
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.
PROVISION FOR LIABILITIES AND CHARGES
Provisions are recognised when there is a present legal or
constructive obligation as a result of a past event, for which it
is probable that an outflow of economic benefit will be required
to settle the obligation and where the amount can be reliably
estimated.
FINANCIAL INSTRUMENTS
Classification of financial instruments
Financial instruments are classified as financial assets, financial
liabilities or equity instruments.
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
36
Instem plc Annual Report, 2017
accounting policies
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.
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.
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.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is
more likely than not that sufficient and suitable taxable profits will
be available in the future against which the reversal of temporary
differences can be deducted. Where the temporary differences
are related to losses, relevant tax law is considered to determine
the availability of the losses to offset against the future taxable
profits. The amount recognised in the consolidated financial
statements is derived from management’s best estimation and
judgement incorporating forecasts and all available information.
Recognition therefore involves judgement regarding the future
financial performance of the particular legal entity or tax group in
which the deferred tax asset has been recognised.
Provision for liabilities and charges
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it is
probable that the Group will be required to settle the probable
outflow of resources, and a reliable estimate can be made of the
amount of the obligation. As at 31 December 2017, the Group
has made a provision of £0.25m in respect of historical contract
disputes as the directors have considered that the above
provision conditions have been met. The provision represents
the best estimate of the risks and considers all information and
legal advice received by the Group.
Impairment
At each reporting date, the Group reviews the carrying amounts
of goodwill and investments. The recoverable amount of
the asset is estimated in order to determine the extent of the
impairment loss (if any). Where the asset does not generate
cash flows that are independent from other assets, the Group
estimates the recoverable amount of the cash-generating unit
to which the asset belongs. A key factor which could result in an
impairment of goodwill or investments is lower than predicted
profitability.
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 2017. The Group and Company have
chosen not to adopt any amendments or revised standards early.
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
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
IFRS 15 ‘Revenue from Contracts with Customers’ will replace
IAS 18 ‘Revenue’ for accounting periods commencing on or after
1 January 2018. For Instem, the effective date is the financial
year commencing 1 January 2018.
The core principle of the standard is that an entity will recognise
revenue at an amount that reflects the consideration to which
the entity expects to be entitled in exchange for transferring
promised goods or services to a customer. To apply this
principle, entities must follow the five-step model below:
1.
2.
Identify the contract(s) with a customer written, oral or
implied by an entity’s customary business practices.
Identify the performance obligations in the contract(s)
and evaluate the terms in the contract to identify all the
promised goods or services and then determine which of
these will be treated as separate performance obligations.
3. Determine the transaction price – the amount that an entity
expects to be entitled to in exchange for transferring goods
or services to a customer.
4. Allocate the transaction price to the performance
obligations.
5. Recognise revenue when the entity satisfies each
performance – when control of a promised good or service
transfers to the customer.
The Group are progressing their review of the implications and
impact of IFRS 15 ‘Revenue from Contracts with Customers’ by
thorough and careful review of the customer contracts across
the Instem group. Full disclosure will be reported in the June
2018 interim statement. The Group are also considering IFRS
16 ‘Leases’ for 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 12 ‘Recognition of Deferred Tax Assets for Unrealised
Losses’ (Amended) effective – 1 January 2017
IAS 7 ‘Disclosure initiative’ (Amended) effective - 1 January 2017
Instem plc Annual Report, 2017 37
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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 and support fees
Professional services
Outsourced services
REVENUE BY GEOGRAPHICAL LOCATION
United Kingdom
Rest of Europe
USA and Canada
Rest of World
REVENUE
2016
£000
4,162
7,716
4,027
2,257
157
2017
£000
5,813
8,442
4,406
1,891
1,116
21,668
18,319
REVENUE
2017
£000
2,670
4,567
12,246
2,185
21,668
2016
£000
3,329
3,232
9,829
1,929
18,319
BY GEOGRAPHICAL LOCATION
United Kingdom
Rest of Europe
USA and Canada
Rest of World
NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION
2017
£000
17,167
320
214
38
17,739
2016
£000
17,750
16
165
50
17,981
Major customers
There were no customers which represented more than 10% of the Group revenue in 2017 and 2016.
38
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
2. Profit Before Non-Recurring (Costs)/Income
Profit 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
Other services
2017
£000
156
30
-
1,404
1,831
61
521
21
67
16
22
17
-
1
2016
£000
126
30
2
1,047
1,840
39
481
17
64
16
18
4
47
-
144
166
Instem plc Annual Report, 2017 39
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
2. Profit Before Non-Recurring (Costs)/Income (continued)
The following table analyses the nature of operating expenses:
2017
£000
Staff costs (see note 6)
11,981
Operating lease rentals
Software maintenance charges
Licence costs
Other expenses
582
549
1,685
3,752
Total operating expenses
18,549
3. Non-Recurring (Costs)/Income
Professional fees in respect of acquisitions
Amendment to consideration payable in respect of Instem Clinical
2017
£000
-
-
Restructuring costs
(341)
Restructuring costs in respect of Instem Clinical
Amendment to contingent consideration post acquisition
Cost provision relating to historical contract disputes
-
148
(250)
(443)
2016
£000
10,706
520
444
599
4,574
16,843
2016
£000
(249)
690
-
(149)
327
-
619
The professional fees in the prior year relate to the acquisition of Samarind Limited on 27th May 2016 and Notocord on 2nd September
2016.
During the previous year, the Group reached agreement with the previous owners of Instem Clinical resulting in the release of Instem
from its obligation to pay the final consideration payments.
The restructuring costs relate to the redundancy and legal costs relating to the Group’s business reorganisation and integration strategy
which was implemented in the first half of 2017.
The contingent consideration in respect of Samarind Limited and the Notocord group was estimated at its fair value at the date of
acquisition. This was re-measured at each reporting date and the estimation of the contingent consideration payable has reduced.
As at 31 December 2017, the Group has made a provision of £0.25m in respect of historical contract disputes. See Critical Accounting
Estimates and Judgements in the accounting policies.
40
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
4. Finance Income
Foreign exchange gains
Other interest
5. Finance Costs
6. Employees
Bank loans and overdrafts
Unwinding discount on deferred consideration
Net interest charge on pension scheme
Foreign exchange losses
Finance lease interest
2017
£000
184
2
186
2017
£000
112
71
129
-
6
318
2016
£000
-
-
-
2016
£000
32
120
139
347
8
646
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
2017
Number
2016
Number
43
174
217
2017
£000
10,181
1,047
753
11,981
42
154
196
2016
£000
9,045
890
771
10,706
In addition to the above employment costs, the Group had non-recurring employment costs of £0.34m (2016: £0.15m) as disclosed in
note 3.
The Company had three employees during the year and the prior year. These employees are non-executive directors of the Company
and their remuneration is disclosed in note 8.
Instem plc Annual Report, 2017 41
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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.
2017
2016
Weighted
average exercise
Number
price (£)
Outstanding at the beginning of the year
1,209,093
Granted
20,000
Lapsed
(104,209)
Exercised
(26,654)
Outstanding at end of the year
1,098,230
Exercisable at end of year
757,881
1.07
0.10
0.10
1.07
1.14
1.61
Weighted
average exercise
price (£)
1.02
0.10
0.10
0.83
1.07
1.59
Number
1,387,016
104,558
(141,250)
(141,231)
1,209,093
784,535
The options outstanding at 31 December 2017 and 31 December 2016 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 4 years 11 months (2016: 6 years 1 month).
A charge of £0.2m (2016: £0.2m) 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
2017
0.10
1.79
3
26.4
10
3
2%
-
-
Fair value of options
1.69
Volatility since listing in 2010 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 21,599 shares (2016: 312,058) 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 was £0.03m (2016: £0.3m).
During the year, the average share price in respect of share options exercised was £1.65 (2016: £2.55).
42
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
8. Directors’ Emoluments
Amounts payable by Instem plc:
Emoluments*
Amounts payable by subsidiary companies:
Emoluments
Defined contribution pension contributions
Total emoluments
2017
£000
120
340
40
500
2016
£000
112
335
40
487
* The above emoluments include £30,000 (2016: £30,000) payable to third parties as shown in note 29.
2017
Number
2016
Number
Number of directors to whom retirement benefits
are accruing under:
Defined contribution schemes
2
2
The highest paid director is shown in the Directors’ Remuneration Report.
Instem plc Annual Report, 2017 43
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
9. Taxation
Income taxes recognised in profit or loss:
Current tax:
UK corporation tax on profit of the year
Amounts in respect of previously unrecognised losses
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 (charge)/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 recognised in the current year
The income tax expense can be reconciled to the accounting profit
as follows:
Profit before tax
Profit before tax multiplied by standard rate of corporation tax in
the UK 19.25% (2016: 20%)
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 credit recognised in consolidated statement of
comprehensive income
2017
£000
-
-
(379)
306
337
567
831
(121)
-
(357)
(56)
-
(534)
297
2017
£000
797
(153)
(74)
(101)
(105)
286
(69)
-
567
(102)
48
-
-
297
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
44
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
10. Intangible Assets
Goodwill
Software
property
relationships
Patents
Group
£000
£000
£000
£000
£000
Intellectual
Customer
Cost
At 1 January 2016
9,507
2,874
2,222
Additions from continuing
operations
-
Additions from acquisitions
1,508
Exchange adjustment
-
At 31 December 2016
11,015
Additions from continuing
operations
-
Fair value adjustment
(425)
Transferred from work in
progress
Exchange adjustment
-
-
890
-
10
3,774
1,517
-
166
(25)
-
2,305
-
4,527
-
-
-
-
957
-
1,917
-
2,874
-
-
-
-
At 31 December 2017
10,590
5,432
4,527
2,874
Amounts written off
At 1 January 2016
Amortisation expense
Exchange adjustment
At 31 December 2016
Amortisation expense
Exchange adjustment
At 31 December 2017
Net book value
-
-
-
-
-
-
-
At 31 December 2016
11,015
At 31 December 2017
10,590
1,444
380
11
1,835
473
(4)
2,304
1,939
3,128
1,493
442
-
1,935
613
-
2,548
2,592
1,979
589
224
-
813
318
-
1,131
2,061
1,743
21
-
-
-
21
-
-
-
-
21
20
1
-
21
-
-
21
-
-
Total
£000
15,581
890
5,730
10
22,211
1,517
(425)
166
(25)
23,444
3,546
1,047
11
4,604
1,404
(4)
6,004
17,607
17,440
A fair value adjustment was identified within 12 months of the acquisition of Notocord in respect of the current tax liability which was
overstated by £0.4m. This fair value adjustment has reduced the goodwill arising on acquisition from £0.9m to £0.5m during the year
ended 31 December 2017.
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 (2016: £2.3m) with accumulated amortisation of £1.2m (2016:
£0.9m). Software additions for the year include £1.4m relating to internal development (2016: £0.8m).
Impairment of goodwill
Goodwill amounting to £5.9m (2016: £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 (2016: £0.5m), relates to a CGU, being
the Instem Scientific Limited business acquired on 3 March 2011. Goodwill amounting to £2.5m (2016: £2.5m), relates to a CGU, being
the Instem Clinical Holdings Limited business acquired on 10 May 2013. Goodwill amounting to £0.7m (2016: £0.7m) relates to a CGU,
being the Perceptive Instruments Limited business acquired on 21 November 2013. Goodwill amounting to £0.5m (2016: £0.5m) relates
to a CGU, being the Samarind Limited business acquired on 27 May 2016. Goodwill amounting to £0.5m (2016: £0.9m) relates to a
CGU, being the Notocord business acquired on 2 September 2016.
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.
Instem plc Annual Report, 2017 45
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
10. Intangible Assets (continued)
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 pre-tax 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 2017, a pre-tax discount rate of 8.9% (2016: 9.1%) was used in the value-in-use calculation based on
the Group’s cost of capital.
Projected cash flows were based on detailed profit and cashflow projections through to 2018 with a 2.5% assumption of growth beyond
2018. 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 390%, for the Instem Scientific CGU
by 848%, for Instem Clinical CGU by 353%, Perceptive Instruments CGU by 477%, Samarind CGU by 504% and Notocord CGU by
228%. 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 29%, or a reduction in certain revenues of in excess of 11%, would result in the recoverable
amount of the Instem LSS CGU being equal to its carrying amount. An additional increase of 38% in the Instem Scientific discount rate,
or a reduction in revenues of 3% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional
increase of 37% in the Instem Clinical 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 51% in the Perceptive Instruments discount rate, or a reduction in
revenues of 6% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional increase of 54%
in the Samarind discount rate, or a reduction in revenues by 9% 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 13% 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.
11. Investments
Company
Cost at beginning of year
Additions
At end of year
£000
28,426
285
28,711
At the end of the year the company has seven wholly-owned subsidiaries and eleven wholly-owned sub-subsidiaries, details of which
are as follows:
Company
Registered Address
Activity
Ownership
Instem Life Science Systems
Diamond Way
Limited
(company number 04339129)
Stone Business Park
Stone, Staffordshire
England and Wales
ST15 0SD
Instem LSS Limited
(company number 03548215)
England and Wales
Instem LSS (North America) Limited
(company number 02126697)
England and Wales
Instem LSS (Asia) Limited
(company number 1371107)
Hong Kong
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Suite 1106-8
11/F Tai Yau Building
No 181 Johnston Road
Wanchai
Holding Company
100% by Instem plc
Software development,
100% by Instem Life
sales, sales support and
Science Systems
administrative support
Limited
Sales, sales support and
100% by Instem LSS
administrative support
Limited
Holding Company
100% by Instem LSS
Limited
46
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
11. Investments (continued)
Company
Registered Address
Activity
Ownership
Instem Information Systems
Room 205, Building 16
(Shanghai) Limited
88 Da’erwen Road
(company number 310115400257075)
Zhanjiang, High Tech Park
Shanghai, PRC
Pudong District 201203
Sales, sales support and service
100% by Instem LSS
(Asia) Limited
Instem Scientific Limited
(company number 03861669)
England and Wales
Instem Scientific Solutions Limited
(company number 03598020)
England and Wales
Instem Scientific Inc.
USA
Instem India Pvt Limited
(company number
U73100MH2012FTC231951)
India
Instem Clinical Holdings Limited
(company number 05840032)
England and Wales
Instem Clinical Limited
(company number 06959053)
England and Wales
Instem Clinical Inc.
USA
Perceptive Instruments Limited
(company number 02498351)
England and Wales
Instem Japan K.K
(company number 0104-01-120355)
Japan
Samarind Limited
(company number 02105894)
England and Wales
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Suite 1550
161 Washington Street
8 Tower Bridge
Conshohocken PA 19428
302, Third Floor
Lalani Quantum
Bavdhan (Budruk)
Pune 411021
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Suite 1550
161 Washington Street
8 Tower Bridge
Conshohocken PA 19428
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Shinagawa
Intercity Tower, A Level 28
2-15-1 Konan, Minato-ku
Tokyo 108-6028
Diamond Way
Leading provider of software solutions
for extracting intelligence from R&D
100% by Instem plc
related healthcare data
Dormant
100% by Instem
Scientific Limited
Leading provider of software solutions
for extracting intelligence from R&D
related healthcare data
100% by Instem
Scientific Limited
Software development
99.9% by Instem
LSS Limited
0.1% by Instem LSS
(NA) Limited
Holding of intellectual property
rights and investment in group
100% by Instem plc
companies
Provision of electronic data capture and
100% by Instem
clinical management solutions to the
Clinical Holdings
pharmaceutical industry
Limited
Provision of electronic data capture and
100% by Instem
clinical management solutions to the
Clinical Holdings
pharmaceutical industry
Limited
Development, manufacture and supply
of software and hardware products for
in vitro study data collection and study
100% by Instem plc
management in the genetic toxicology,
microbiology and immunology markets
Sales, sales support and service
100% by Instem LSS
Limited
Stone Business Park
Provider of regulatory information
Stone, Staffordshire
management software
100% by Instem plc
ST15 0SD
Notocord Systems S.A.
113 Chemin de Ronde
(company number 350927349)
Croissy-sur-Seine
Software development, sales support
and administrative support
100% by Instem plc
France
Notocord Inc.
USA
Paris 78290
Suite 1550
161 Washington Street
Sales, sales support and administrative
100% by Notocord
8 Tower Bridge
support
Conshohocken PA 19428
Systems S.A.
Instem plc Annual Report, 2017 47
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
12. Property, Plant and Equipment
Group
Cost
At 1 January 2016
Additions
Acquisitions
Disposals
Exchange adjustment
At 31 December 2016
Additions
Disposals
Exchange adjustment
At 31 December 2017
Depreciation
At 1 January 2016
Acquisitions
Depreciation expense
Disposals
Exchange adjustment
At 31 December 2016
Depreciation expense
Disposals
Exchange adjustment
At 31 December 2017
Net book value
At 31 December 2016
At 31 December 2017
Short leasehold
IT hardware &
property
£000
software
£000
74
3
-
(1)
3
79
-
-
(1)
78
41
-
14
(1)
3
57
4
-
(1)
60
22
18
2,157
110
103
(1,384)
71
1,057
117
(259)
(22)
893
1,814
73
142
(1,382)
58
705
182
(259)
(16)
612
352
281
Total
£000
2,231
113
103
(1,385)
74
1,136
117
(259)
(23)
971
1,855
73
156
(1,383)
61
762
186
(259)
(17)
672
374
299
IT hardware and software includes assets with a net book value of £0.07m (2016: £0.10m) held under finance lease. The depreciation
on these assets during the year was £0.03m (2016: £0.03m).
48
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
13. Inventories
Group
Raw materials
Work in progress
Total gross inventories
14. Trade and Other Receivables
Group
Trade receivables
Amounts recoverable on contracts
Prepayments and accrued income
Company
Amounts owed by group companies
Other receivables
2017
£000
14
15
29
2017
£000
29
2017
£000
6,104
2,389
977
9,470
2,192
54
2,246
2016
£000
27
889
916
2016
£000
916
2016
£000
5,104
894
901
6,899
2,217
84
2,301
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
Receivables written off
Reversal of provision for impairment
At end of year
2017
£000
94
64
(31)
(54)
73
2016
£000
232
9
-
(147)
94
The average credit period taken on sale is 88 days (2016: 68 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, 2017 49
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
14. Trade and Other Receivables (continued)
The age profile of the net trade receivables for the Group at the year-end was as follows:
Group
2017
Current
0-30
days
31-60
days
Over 60
days
Total
Debt age
Trade receivables/Amounts recoverable
on contracts
Value (£000)
5,011
1,806
1,012
%
59
21
12
664
8
8,493
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
2017
£000
3,928
576
4,551
288
127
9,470
2016
£000
2,511
784
3,056
488
60
6,899
50
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
15. Financial Asset
Group and Company
Forward foreign exchange contract
2017
£000
-
2016
£000
10
As at 31 December 2016 the Group and Company had one short term forward foreign exchange contract to purchase Euros at a
guaranteed rate. The above represented the fair value of the contract at 31 December 2016. There were no contracts in place as at 31
December 2017.
16. Cash and Cash Equivalents
Group
Cash at bank
Bank overdraft
Company
Cash at bank
2017
£000
12,062
(8,998)
3,064
1,036
2016
£000
13,187
(8,998)
4,189
2,221
The Group’s 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 Group 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
2017
£000
(1,539)
683
3,034
828
58
3,064
1,036
-
1,036
2016
£000
(1,138)
1,687
2,329
1,243
68
4,189
1,165
1,056
2,221
The carrying amount of these assets approximates to their fair value.
Instem plc Annual Report, 2017 51
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
17. 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
2017
£000
548
410
1,819
2,777
35
3,659
182
3,876
2017
£000
1,547
246
918
15
51
2,777
3,876
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
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
2017
Trade and other payables (£000)
%
Group
2016
Trade and other payables (£000)
%
Current
2,370
86
Current
2,634
99
0-30
days
369
13
0-30
days
24
1
31-60
days
Over 60
days
34
1
4
-
31-60
days
Over 60
days
-
-
12
-
Total
2,777
100
Total
2,670
100
52
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
18. Current Taxation
The Group current tax receivable of £1.3m and payable of £0.2m (2016: payable of £0.4m) represents the amount of income taxes
receivable and payable in respect of current and prior years.
The Company current tax payable is £nil (2016: £nil).
19. Financial Liabilities
Group
2017
Deferred contingent consideration
Finance lease liabilities
Total
£000
188
83
271
Less than
One to
More than
one year
two years
two years
£000
£000
£000
188
32
220
-
51
51
-
-
-
Company
Less than
One to
More than
2017
Total
£000
one year
two years
two years
£000
£000
£000
Deferred contingent consideration
188
188
-
-
Group
2016
Deferred contingent consideration
Finance lease liabilities
Total
£000
1,108
113
1,221
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
2016
Total
£000
one year
two years
two years
£000
£000
£000
Deferred contingent consideration
1,108
950
158
-
Deferred contingent consideration
The deferred contingent consideration above includes £0.2m (2016: £0.6m) in respect of the acquisition of Samarind Limited and £nil
(2016: £0.5m) in respect of the acquisition of Notocord Systems S.A.
The estimation of deferred consideration in respect of the acquisition of Samarind Limited and Notocord Systems S.A. as at 31 Decem-
ber 2016 was contingent on performance criteria relating to 2017. As at 31 December 2017 there are no remaining performance criteria.
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 20.
Instem plc Annual Report, 2017 53
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
19. Financial Liabilities (continued)
Finance lease liabilities
Minimum lease payments
Present value of minimum
lease payment
31 December
31 December
31 December
31 December
2017
2016
2017
2016
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
54
90
(7)
83
36
90
126
(13)
113
32
51
83
-
83
29
84
113
-
113
Reconcilitaion of liability arising from financing
31 December 2017
31 December 2016
activities
At the beginning of the year
Repayment of finance leases
At the end of the year
£000
113
(30)
83
£000
145
(32)
113
20. 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.
2017
Group and Company
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Deferred contingent consideration
-
-
(188)
(188)
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
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.
54
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
20. Financial Instruments (continued)
The following table shows a reconciliation from the opening balances as at 1 January 2017 to the closing balances as at 31 December
2017 for Level 3 fair value measurements in respect of both the Group and Company.
Deferred contingent consideration
Balance as at 1 January 2017
Cash repayment in the year
Satisfied by share consideration
Unwinding discount*
Change in fair value**
Adjustment in respect of foreign exchange*
Balance as at 31 December 2017
£000
1,108
(687)
(175)
71
(148)
19
188
* Recognised in consolidated statement of comprehensive income and reflected in finance income
** Recognised in consolidated statement of comprehensive income and reflected in non-recurring income/(costs)
FINANCIAL RISK MANAGEMENT
The Group’s activities expose it to a variety of financial risks. 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 (2016: £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 2017, the indications are that the UK bank base interest rate will not materially differ over the next 12 months. On
the basis of the net cash position at 31 December 2017 and assuming no other changes occur (such as material changes in currency
exchange rates) the change in interest rates will not have a material impact on net interest income/(expense).
Instem plc Annual Report, 2017 55
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
20. Financial Instruments (continued)
2017
Group
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred contingent consideration
Finance lease
2016
Group
Trade and other receivables
Financial asset
Cash and cash equivalents
Trade and other payables
Deferred contingent consideration
Finance lease
2017
Company
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred contingent consideration
2016
Company
Trade and other receivables
Financial asset
Cash and cash equivalents
Trade and other payables
Deferred contingent consideration
Fixed
rate
£000
-
-
-
-
(83)
(83)
Fixed
rate
£000
-
-
-
-
-
(113)
(113)
Fixed
rate
£000
-
-
-
-
-
Floating
rate
£000
Non-interest
bearing
£000
-
3,064
-
-
-
3,064
8,493
-
(2,367)
(188)
-
5,938
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
-
1,036
-
-
1,036
2,246
-
(3,876)
(188)
(1,818)
Fixed
rate
£000
Floating
rate
£000
Non-interest
bearing
£000
-
-
-
-
-
-
-
-
2,221
-
-
2,221
2,301
10
-
(4,322)
(1,108)
(3,129)
Total
£000
8,493
3,064
(2,367)
(188)
(83)
8,919
Total
£000
5,998
10
4,189
(2,394)
(1,108)
(113)
6,582
Total
£000
2,246
1,036
(3,876)
(188)
(782)
Total
£000
2,301
10
2,221
(4,322)
(1,108)
(908)
56
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
20. 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 (2016:
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 14 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 2017, its £2.0m bank facility was
undrawn (2016: £2.0m undrawn).
In respect of the Group’s interest-bearing financial liabilities, the table in note 19 includes details at the reporting date of the periods in
which they mature.
21. Deferred Tax
Group
Deferred tax asset
Amounts due to be recovered within 12 months
Amounts due to be recovered after 12 months
Total deferred tax
2017
£000
-
300
300
2016
£000
-
947
947
Instem plc Annual Report, 2017 57
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
21. Deferred Tax (continued)
The movement in the year in the Group’s net deferred tax asset position was as follows:
At beginning of the year
Net (charge)/credit to income for the year
Net (debit)/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
2017
£000
947
(177)
(113)
-
(357)
-
300
2016
£000
663
804
215
(762)
73
(46)
947
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 2016
Credit/(charge) to profit or loss for the year
Credit to equity for the year
Arising on acquisitions
Adjustments in respect of prior years
Effects of domestic tax rate change on opening
balances
At 31 December 2016
Credit/(charge) to profit or loss for the year
Debit to equity for the year
Adjustments in respect of prior years
£000
(468)
155
-
(762)
223
17
(835)
177
-
-
At 31 December 2017
(658)
£000
257
654
-
-
-
(14)
897
(70)
-
(133)
694
£000
707
(76)
215
-
-
(39)
807
(56)
(113)
-
638
£000
167
71
-
-
(150)
(10)
78
(228)
-
(224)
(374)
Total
£000
663
804
215
(762)
73
(46)
947
(177)
(113)
(357)
300
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 2017 were £0.3m (2016: £nil) due to uncertainty over the timing of the
recoverability of these losses.
58
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
22. Retirement Benefit Obligations
The Group has four 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 2017 were £0.46m (2016: £0.57m).
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 2017 were £0.03m (2016: £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 2017 were £0.11m (2016: £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 2017 were £0.02m (2016: £0.02m).
Perceptive Instruments Limited - The Group made contributions to personal pension arrangements of certain employees. 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 2017 employer contributions to these arrangements prior to auto enrollment totalled £nil. (2016: £0.01m)
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 year ended 31 December
2017 the employer made contributions of £0.02m (2016: £0.01m). These arrangements moved to the Group Personal Pension Plan on
1 November 2017.
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.
Instem plc Annual Report, 2017 59
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
22. Retirement Benefit Obligations (continued)
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.
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 2017 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.
60
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
22. 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
2017
%
2.65
3.10
N/A
3.00
3.10
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 on pension scheme assets in excess of interest
Experience gains on liabilities
Gains from changes to demographic assumptions
Losses from changes to financial assumptions
Actuarial (gain)/loss recognised in other comprehensive expense
CHANGES IN THE PRESENT VALUE OF THE DEFINED BENEFIT OBLIGATION
24.3
25.3
23.2
24.1
2017
£000
278
(407)
(129)
2017
£000
(686)
(183)
(156)
361
(664)
2017
£000
Opening defined benefit obligation
14,436
Interest cost
Benefits paid
Experience gain on liabilities
Changes to demographic assumptions
Changes to financial assumptions
407
(316)
(183)
(156)
361
2016
%
2.85
3.30
N/A
3.00
3.30
Years
24.5
25.8
23.3
24.3
2016
£000
304
(443)
(139)
2016
£000
(1,252)
-
(133)
2,577
1,192
2016
£000
11,782
443
(233)
-
(133)
2,577
Closing defined benefit obligation
14,549
14,436
Instem plc Annual Report, 2017 61
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
22. Retirement Benefit Obligations (continued)
CHANGES IN THE FAIR VALUE OF PLAN ASSETS
Opening plan assets
Expected return
Return on plan assets less interest
Contributions by employer
2017
£000
9,690
278
686
461
Benefits paid
(316)
Closing plan assets
10,799
The actual return on plan assets was a positive return of £0.96m (2016: £1.56m).
AMOUNT RECOGNISED IN THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
2017
£000
2016
£000
7,849
304
1,252
518
(233)
9,690
2016
£000
Present value of funded obligations
(14,549)
(14,436)
Fair value of plan assets
Deficit
Related deferred tax asset
10,799
(3,750)
638
Net pension liability
(3,112)
RECONCILIATION OF NET DEFINED BENEFIT LIABILITY
Opening net defined benefit liability
Net interest expense
Remeasurements
Contributions by employer
2017
£000
4,746
129
(664)
(461)
Closing net defined benefit liability
3,750
9,690
(4,746)
807
(3,939)
2016
£000
3,933
139
1,192
(518)
4,746
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
Cumulative actuarial loss recognised in other comprehensive expense
2017
£000
2,048
(1,628)
289
(5,380)
(4,671)
2016
£000
1,362
(1,811)
133
(5,019)
(5,335)
62
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
22. Retirement Benefit Obligations (continued)
MAJOR CATEGORIES OF PLAN ASSETS AS A PERCENTAGE OF FAIR VALUE OF TOTAL PLAN ASSETS
2017
2016
Equities
Property
Bonds
Corporate Bonds
Cash
Other
£000
7,468
438
1,104
1,028
553
208
%
69
4
10
10
5
2
The five-year history of experience adjustments is as follows:
10,799
100
£000
6,959
301
1,232
167
424
607
9,690
%
72
3
13
2
4
6
100
2017
£000
2016
£000
2015
£000
2014
£000
2013
£000
Present value of defined benefit
obligation
(14,549)
(14,436)
(11,782)
(11,405)
(10,529)
Fair value of plan assets
10,799
9,690
7,849
7,524
7,023
Deficit
(3,750)
(4,746)
(3,933)
(3,881)
(3,506)
Experience gains/(loss) on plan
liabilities
156
-
-
(138)
Return on plan assets less interest
686
1,252
(136)
(7)
-
612
The Group expects to contribute £0.5m to its defined benefit plan in the next financial year (2016: £0.5m).
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
(1,279)
1,460
1,229
(1,104)
(485)
490
Instem plc Annual Report, 2017 63
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
23. Provision for Liabilities and Charges
At 1 January
Increase in provision during the year
At 31 December
During the year the Group made a provision of £0.25m in respect of historical contract disputes.
24. Share Capital
Allotted, called up and fully paid
At 1 January
15,771,398 ordinary shares of 10p each (2016: 13,043,774)
115,262 (2016: 2,727,624) ordinary shares of 10p each, issued during the year
At 31 December
2017
£000
-
250
250
2017
£000
1,577
12
1,589
2016
£000
-
-
-
2016
£000
1,304
273
1,577
On 5 June 2017, the Company issued 88,608 new ordinary shares in respect of partly satisfying the deferred consideration of the
acquisition of Samarind Limited. In addition, 26,654 shares were issued during the year in respect of the exercise of share options.
64
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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.
2017
Weighted
average
number of
shares (000’s)
15,831
328
16,159
Earnings per
share (pence)
Profit after
tax (£000)
6.9
-
6.8
1,058
-
1,058
2016
Weighted
average
number of
shares (000’s)
15,302
324
15,626
Earnings per
share (pence)
6.9
-
6.8
Profit after
tax (£000)
Earnings per share - Basic
1,094
Potentially dilutive shares
-
Earnings per share - Diluted
1,094
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
2,234
Potentially dilutive shares
-
Earnings per share - Diluted
2,234
2017
Weighted
average
number of
shares (000’s)
15,831
328
16,159
Adjusted
earnings per
share (pence)
Adjusted
profit after
tax (£000)
14.1
-
13.8
1,752
-
1,752
2016
Weighted
average
number of
shares (000’s)
15,302
324
15,626
Reconciliation of adjusted profit after tax:
Reported profit after tax
Non-recurring costs/(income)
Amortisation of acquired intangibles
Foreign exchange differences on revaluation of inter-group balances
Adjusted profit after tax
2017
£000
1,094
443
931
(234)
2,234
Adjusted
earnings per
share (pence)
11.5
-
11.2
2016
£000
1,058
(619)
667
646
1,752
Instem plc Annual Report, 2017 65
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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 (2016: £nil).
66
Instem plc Annual Report, 2017
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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
2017
£000
582
2017
£000
461
1,369
368
24
20
2016
£000
520
2016
£000
444
778
236
10
13
2,242
1,481
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 the office buildings contain 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, 2017 67
NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017
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 £0.7m (2016: £0.6m). The net intercompany balances due from the
Company at the year-end totalled £1.5m (2016: due from: £1.9m).
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:
2017
£000
2016
£000
Key management compensation:
Group and Company
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
90
-
10
-
100
Group
Executive Directors
Salaries and short-term benefits
340
Post-employment retirement benefits
Employers’ national insurance & social security costs
Share based payment charge
40
24
73
477
Group
Other key management
Salaries and short-term employee benefits
1,029
Post-employment retirement benefits
Employers’ national insurance & social security costs
Share based payment charge
51
67
66
1,213
82
-
9
-
91
335
40
25
105
505
567
49
55
84
755
The Company paid £0.05m (2016: £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 (2016: £nil).
In addition, the Company paid £0.03m (2016: £0.03m) 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 £nil (2016: £0.009m).
In November 2016, the Group made a 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 (2016: £0.07m).
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 (2016: £9.0m).
68
Instem plc Annual Report, 2017
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
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
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
Our clients include these fine organisations...
Instem supports over 500 clients
through full service offices in the
United States, United Kingdom,
France and China with additional
locations in India 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
instem.com