A N N U A L
R E P O R T
2019
0
0
5
M o r e t h a n 5 0 0
c l i e n t s
Instem has over 500
customers with its blue
chip customer base
consisting of the leading
pharmaceutical, medical
device, chemical and
contract research
organisations as well as
academic, government
and privately funded
research institutions
across many sites
worldwide. These
include all of the top
25 pharmaceutical and
biotech companies such
as GlaxoSmithKline and
AstraZeneca.
A n n u a l R e p o r t
2
CONTENTS
HIGHLIGHTS
CHAIRMAN’S STATEMENT
STRATEGIC REPORT
BOARD OF DIRECTORS
CORPORATE GOVERNANCE STATEMENT
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REPORT
DIRECTORS’ RESPONSIBILITY STATEMENT
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 STATEMENT OF CHANGES IN EQUITY
COMPANY STATEMENT OF CHANGES IN EQUITY
ACCOUNTING POLICIES
NOTES TO THE FINANCIAL STATEMENTS
DIRECTORS AND ADVISORS
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100
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A s t h e n u m b e r o n e
g l o b a l p r o v i d e r ,
w e e s t i m a t e t h a t
a p p r o x i m a t e l y
h a l f o f t h e w o r l d ’ s
p r e c l i n i c a l d r u g
s a f e t y d a t a h a s b e e n
c o l l e c t e d o v e r t h e
l a s t 2 0 y e a r s u s i n g
I n s t e m s o f t w a r e .
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P o w e r f u l S o l u t i o n s • U n i q u e P e r s p e c t i v e • G l o b a l C o v e r a g e
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.
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H I G H L I G H T S
W e a r e d e l i g h t e d w i t h o u r p e r f o r m a n c e d u r i n g t h e p e r i o d
w i t h o u r p r o v e n b u s i n e s s m o d e l g e n e r a t i n g
i m p r o v e m e n t s a c r o s s a l l o f o u r k e y p e r f o r m a n c e m e t r i c s .
F I N A N C I A L H I G H L I G H T S
O P E R A T I O N A L H I G H L I G H T S
• Revenues increased 13% to £25.7m (2018:
• Continued transition to SaaS deployment,
increasing recurring revenue
• Rapidly growing informatics service, automating
a key industry process of “Target Safety
Assessment”
• Earnings enhancing acquisition of Leadscope
Inc for up to $4.7m, extending our artificial
intelligence technology offering and opening up
cross-selling and upselling opportunities
• FDA’s SEND initiative continued to underpin
strong technology enabled outsourced services
revenue growth
£22.7m)
•
Software as a Service (SaaS) revenues
increased 16% to £6.4m (2018: £5.5m)
• Recurring revenues (annual support and
SaaS) increased 9% to £14.9m (2018: £13.7m)
• Adjusted EBITDA* of £4.9m (2018: £4.1m)
• Reported loss before tax of £0.9m (2018: profit of
£1.7m), after **non-cash goodwill and intangible
asset impairment of £3.2m (2018: £nil)
• Adjusted profit before tax*** of £3.2m (2018:
£2.8m)
• Fully diluted loss per share of (5.7p) (2018: 8.7p
earnings per share)
• Adjusted*** fully diluted earnings per share of
18.4p (2018: 15.5p)
• Cash balance as at 31 December 2019 of £6.0m
(2018: £3.6m)
*Earnings before interest, tax, depreciation, amortisation,
impairment of goodwill and capitalised development costs and
non-recurring items. 2019 reflects the adoption of IFRS16.
** This is associated with our Clinical business and covered in
more detail in the Strategic Report.
***After adjusting for the effect of foreign currency exchange on
the revaluation of inter-company balances included in
finance income/(costs), non-recurring items, impairment of
goodwill and capitalised development costs and amortisation
of intangibles on acquisitions.
Profit is adjusted in this way to provide a clearer measure of
underlying operating performance.
6
We are delighted with our performance during the
period with our proven business model generating
improvements across all of our key performance
metrics. We have an established base from which to
grow, both organically and via acquisition, and have
established long-term relationships with our blue-chip
client base. Importantly, we are well positioned to add
new clients and generate increasing revenues from
existing clients while our transition to a SaaS model
increases visibility.
Increased revenue predictability and high retention
rates provide a strong foundation from which the
business can grow as it builds on the momentum
achieved during 2019. While some future uncertainty
inevitably remains as a consequence of the COVID-19
pandemic, the majority of our revenue comes from
clients whose laboratories are regarded as “essential
businesses” and therefore remain active, with many
working on COVID-19 related vaccines and therapies.
Consequently, we have remained very busy, have good
visibility over a strong H1 2020 performance and
continue to have confidence in the longer term outlook
for the business, supported by a strong cash balance
at the end of April 2020 of £8.3m. Our staff are
currently working effectively from home and are highly
motivated by our work which is directly contributing to
COVID-19 research and development.
P J Reason
Chief Executive
H i g h l i g h t s
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“Our performance for the full year
builds on the momentum achieved
during the first half, with the
Company producing strong results
across all business areas whilst
strengthening its overall offering via
the acquisition of Leadscope."
D Gare
Non-Executive Chairman
C h a i r m a n ' s S t a t e m e n t
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C H A I R M A N ' S S T A T E M E N T
Our performance for the full year builds on the momentum
achieved during the first half, with the Company producing
strong results across all business areas whilst strengthening
its overall offering via the acquisition of Leadscope.
We are delighted to report a 13% increase in total revenues
year-on-year. Our strategic move towards high quality
SaaS revenues contributed to a 9% growth in recurring
revenues for the period, providing increased levels of
certainty and visibility. Importantly, the proportional
reduction in perpetual licence revenues makes the business
less susceptible to the unpredictable nature of relying on
significant contract wins to meet forecast expectations.
The cash balance at the year-end was £6.0m (2018: £3.6m).
F I R M F O U N D A T I O N S
Given the successful and ongoing transition to SaaS-based
revenues the Company is benefiting from increasing levels
of predictability whereby revenues are recognised on a
monthly basis over the subscription period. This form
of contract is proving attractive to both existing and new
clients. The Company has proven its ability to manage this
strategic change in revenue mix with SaaS-based orders
and revenue growth exceeding the Board’s expectations
during the period.
The combination of organic and acquisitive growth during
the period has resulted in a further diversification of
revenue streams while also providing opportunities for
the Company to cross-sell and upsell to existing clients.
November’s acquisition of Leadscope strengthened the
Company’s Artificial Intelligence (“AI”) offering. We see
the AI sector as an increasingly important part of our
business and are extremely excited by the growth potential,
albeit from a low base.
S T R A T E G I C D I R E C T I O N
The business has a number of key growth drivers and we
believe that the momentum achieved during the period
provides validation of its strategic potential. We were
delighted to have made notable progress on a number of
fronts during the period, namely:
• Continued growth in SaaS-based revenues both through
new business wins and via the ongoing conversion of
existing clients. As such, SaaS-based revenue increased
16% to £6.4m during the period;
• The expansion of "technology enabled outsourced
services", where 2019 revenue was £5.6m (2018: £3.3m):
• Our market leading offering for the SEND services
business continued to perform well during the
period.
• We strengthened our AI services with increased
demand for Target Safety Assessment (“TSA”)
driving revenue growth and the acquisition of
Leadscope broadening our offering. This has
provided a new entry point for the Company,
consequently strengthening growth opportunities
within our existing client base whilst at the same
time increasing our attraction to new clients.
We have made a non-cash impairment provision of
£3.2m against goodwill and other intangible assets in our
Alphadas early phase clinical data collection business,
which is commented on in more detail in the Strategic
Report. The proportion of revenue associated with the
clinical business is immaterial in the context of the Group
as a whole.
In light of COVID-19, the Instem Board decided in
March 2020 that until any material business risk from
the pandemic is behind us, our 2020 objectives would be
moderated so that we can successfully navigate the crisis.
We will strive to ensure that we retain a global, leading and
enthusiastic set of employees, clients and investors, who
will enable us to capitalise on opportunities as the world
recovers. Consequently, our revised focus will be to:
• Ensure our staff and their families stay safe, engaged
and effective;
• Provide the products and services that our clients need
to continue their important work; and
• Take appropriate action where necessary to safeguard
our strong and stable financial position.
Notwithstanding COVID-19, our non-organic growth
ambitions remain
intact; we continue to evaluate
acquisition opportunities and our strategy to consolidate
our fragmented industry is a key focus. We will maintain
our rigorous approach to appraisal and diligence of any
acquisition targets. I remain confident that our objective
to acquire complementary technologies or enter adjacent
markets will be successfully executed, particularly given
our balance sheet strength.
I am pleased to report that our staff have safely and
effectively transitioned to home working, our clients
have, on the whole, continued to operate and Instem is
increasingly playing an important role in contributing
directly
their COVID-19 related research and
to
development activities.
I am extremely satisfied with the Company’s performance
during the period as we continued to grow the business
organically whilst providing an increasingly stable revenue
model with improved quality of earnings. So far in 2020,
business has been strong, we anticipate a robust H1 2020
performance and we are cautiously optimistic that this will
continue through the remainder of the year. In summary
we have a highly scalable platform and are excited by both
organic and acquisitive growth opportunities.
D Gare
Non-Executive Chairman
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S T R A T E G I C R E P O R T
S T R A T E G I C D E V E L O P M E N T
•
•
•
•
‘technology enabled
During the period under review Instem generated
positive returns across the Group with key momentum
drivers being:
•
•
increased levels of recurring revenues;
the ongoing transition to high-quality subscription-
based SaaS revenues;
continued expansion of
outsourced services’;
growing regulatory-backed opportunities;
strong organic growth; and
further broadening of our product portfolio via the
earnings enhancing acquisition of Leadscope.
Importantly, the Company delivered increased profit
whilst investing in its products and personnel. This
provided capacity and scope to increase the Company’s
market share at the same time as increasing cross-
selling and upselling opportunities within the existing
client base.
There was a 78% increase in new business SaaS
subscription order value over the prior year, with the
proportion of SaaS subscription orders compared
with perpetual software licenses increasing from 33%
in 2018 to 64% in 2019. Some of this increased order
value benefited SaaS revenue in 2019 but the first full
year impact will be realised in 2020.
C O V I D - 1 9
With both staff and customers based in China, some
directly in Wuhan, Instem’s Business Continuity team
was engaged at the early stages of the pandemic. Our
first priority was to address personal safety and to then
ensure business continuity for both Instem and our
clients. Our Business Continuity team has continued
to spearhead our response as the crisis has escalated
and spread worldwide.
Like most businesses, we have been closely following
and implementing the advice of agencies, such as
the World Health Organization and US Centers for
Disease Control & Prevention, and quickly introduced
international and domestic travel bans, as well as
policies to increase hygiene and social distancing. We
required staff with even mild symptoms to stay at, or
work from home and thus far our operations have not
been materially impacted.
While these measures have had some impact on client-
related site work, we have worked collaboratively
1 0
with our customers to find ways to complete much of
this work remotely. In some cases, this is increasing
efficiency as we save on both the time and expense of
international travel and we hope to see some enduring
benefits as we, and our clients, realise how much can be
achieved in this way.
Instem is fortunate to have invested heavily over the last
5 years in technology that supports our widely dispersed
workforce and the many staff that already work entirely,
or frequently, from home. Our regulatory compliant
framework, certification to quality standard ISO
9001 and information security management standard
ISO 27001, all require us to have a risk management
and business continuity mindset embedded in the
organisation. We also reflect these requirements with
the operational partners on whom we rely, and they
have confirmed their ability to continue to support
Instem and our clients during this crisis.
We have quickly, but carefully, moved to a position where
all of our staff are working from home, keeping ahead
of those locations where governmental mandatory
“work from home” and/or “shelter at home” is now in
place. As a business supporting critical, life enhancing/
sustaining scientific research and development such
as the activities we are now routinely undertaking to
produce SEND submissions for COVID-19 related
drugs and vaccines, we believe that we will likely retain
the right to attend our offices; however our personnel
are only doing so in exceptional circumstances. We are
starting to see some limited domestic travel to sites in
China, to satisfy prior client commitments, as business
there returns to a “new normal”.
While most of our staff are working equally efficiently
remotely, we are addressing situations where staff need
to balance home working with caring for children at
home or other dependents, and also occasions where
external network connectivity is challenged as entire
regions are restricted to home working and schooling.
The immediate disruption to client operations, as they
determined how to adopt safe working practices for
their essential laboratory staff and transitioned other
staff to home working, seems to be largely behind us.
Some new business opportunities have been delayed,
principally those in the early phase clinical and
academic sectors, although most 2020 opportunities
remain within the year and, to date, no pipeline
opportunities have been cancelled altogether by clients.
While we cannot be certain what the impact will be of
a sustained period of global business disruption, at this
point, we believe that Instem and the majority of our
clients are well positioned to successfully manage their
way through it.
One particularly beneficial impact of the extensive
work-from-home restrictions has been a significant
improvement in the ability for our boutique corporate
finance partner to contact principals in potential
acquisition targets, as part of their target identification
and qualification assignment. It has also facilitated
follow-on meetings for the Instem team with those
businesses deemed interesting, with ongoing dialogue
across a number of potentially interesting opportunities.
Surveys of strategic and financial buyers are suggesting
that acquisition valuation multiples have reduced as a
consequence of COVID-19, which may help unlock
some opportunities for Instem.
S E C T I O N 1 7 2 S T A T E M E N T
In accordance with section 172 of the Companies
Act 2006 the Directors, collectively and individually,
confirm that during the year ended 31 December 2019,
they acted in good faith and have upheld their ‘duty to
promote the success of the company’ to the benefit of
its stakeholder groups.
Instem identifies five key stakeholder groups associated
with our business:
• Employees
• Clients
•
• Partners
• Communities in which we operate
Shareholders
their positive engagement.
Employees
We recognise that our employees are critical to the
success of our business and we focus considerable
attention on
This
commences from their initial induction into the
company where new joiners are introduced to our
Company Values and our Culture Handbook, which
provide a framework for ensuring an alignment
between company and employee interests. There is
frequent and open communication with employees,
who are encouraged to share their opinions, informally
and through regular surveys, both attributable and
anonymous. We have consistently used the Gallup
Q12 engagement questions in our surveys to identify
trends and our survey questions have been expanded
over recent years to align with those used by the Great
Place to Work® organization. Employee-led, location
specific Action Groups propose and
implement
changes to address employee identified opportunities
for improvement.
Clients
We are fortunate to operate in an industry that has a
highly collaborative culture with many businesses and
scientific related societies and organisations. Instem
participates widely in these groups, networking closely
with our clients and prospects, often taking a leadership
role based on the considerable expertise of our staff and
the broad experience we gain from working with many
clients. In addition, Instem organizes multiple client
engagement forums related to sectors of our market,
specific products and common industry practices or
regulation. These Special Interest Groups provide
input to strategy and operations, allowing us to ensure
that our products and services meet the needs of the
entire client (and prospect) community.
We survey our clients annually and, more regularly, at
the completion of each project and as we address each
client support call. These surveys also help us to plan
and prioritise changes to our products, services and the
broader engagement we have with clients across our
business.
In February 2019 we held the first meeting of our new
Client Strategic Advisory Board (“SAB”), comprising
senior staff, with a broad industry perspective, from a
variety of client organisations. The SAB, which meets
twice per year, is tasked with informing/validating
Instem high-level business, product and service
strategy to ensure we maximise our mission to enable
our clients to bring their life enhancing products to
market faster.
Shareholders
With the professional guidance of our broker and
nominated adviser, N+1 Singer, and our financial public
relations advisers, Walbrook PR, the Group engages
with shareholders through multiple channels, aiming
to provide clear and informative updates. Regulated
News Service releases are provided regularly, both
those required as an AIM-listed business and additional
releases to keep shareholders, and the wider market,
informed about interesting business developments. We
undertake multi-day institutional investor roadshows
following the announcement of interim and full-year
results, which provides an opportunity to also engage
with a wider group of financial analysts and media. We
typically also organise or attend retail investor events,
to ensure all shareholders have access to executive
management on a regular basis.
As broker research is typically not available to all
shareholders, we engage Progressive Equity Research
to produce additional analyst research, which is freely
available from the Instem Investor Centre website
and through other investor channels. In addition, we
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S T R A T E G I C R E P O R T ( C O N T I N U E D )
few
subscribe for services from Proactive Investor who make
a range of Instem video and audio interviews available
for shareholder and wider investor consumption,
aggregated with their own financial journalist coverage
of Instem news.
While our annual general meeting typically attracts
very
independent shareholders, voting on
shareholder resolutions provides a formal avenue to
receive shareholder feedback and an opportunity for
us to consider the implications should resolutions
not pass unanimously. We also take note of feedback
from shareholder representative groups, who typically
provide structured feedback ahead of annual general
meetings.
Partners
Instem has a number of strategic partners, with whom
we actively engage to enhance our portfolio of world-
leading products and services. Formal agreements
govern these relationships and nominated Instem
employees are responsible for maintaining a regular
and open dialogue to ensure ongoing alignment
of interests. We frequently engage our partners in
the wide variety of methods of client engagement
described above to ensure they have a direct two-way
line of communication with the end-users.
Communities
Instem has several offices around the world and
many employees who work from home. We recognise
our role as responsible employers and community
representatives and encourage and support our staff in
this regard, regularly providing matching funding for
charitable activities. There are regular staff organised
fund raising events and other activities to support local
causes that occur within our offices.
With only office (and home) based activities, our
environmental
is generally quite modest
although we do encourage efficient energy usage and
recycling in office locations. We also consider energy
usage with our external data centre partners as our
clients increasingly adopt our SaaS solutions increasing
our data centre footprint. Through investment in
technology, staff in the right places and changing
business practices, we are also striving to reduce the
amount of air travel for staff between our international
offices and to our globally dispersed client-base.
Significantly, from a global community perspective, we
also recognise the considerable role we play in helping
our clients to provide their life enhancing products
impact
across the world. We continually assess how we can
optimize what we do to accelerate the availability of
safe and effective drugs, vaccines and medical devices,
as well as safer and more effective agrochemicals, that
help to increase production to feed an ever-growing
world population.
M A R K E T R E V I E W
The market backdrop continues to be favourable for
the Company given global population growth and
life expectancy underpinning
increased demand
for successful innovation in life sciences. Increasing
amounts are being invested in the biotech industry
with the pharmaceuticals sector investing heavily in
drug development.
In the pharmaceutical industry, which represents the
largest proportion of Instem’s revenue, we refer again to
the Pharma R&D Annual Review, the 2020 version of
which was released by Pharma Intelligence in March this
year. This report shows that the industry grew strongly
in the last 12 months with a 9.6% increase (2019: 6%)
in the total number of drugs in the regulatory stages of
global R&D, continuing a multi-year growth trend that,
subject to the potential impact of COVID-19, sees no
sign of abating. Most relevant to Instem is the 13.2%
increase (2019: 6%) in the number of drugs at the pre-
clinical (or non-clinical) phase of drug development,
that accounts for much of our business.
With Instem’s suite of products providing faster and
more cost-effective routes to market by enabling
clients to analyse, report and submit data to regulatory
agencies, the Company continues to benefit from
growing demand for its products and services. The
regulatory-backed Standard for the Exchange of Non-
clinical Data (“SEND”) market is estimated to be worth
approximately $50m in 2021 and Instem remains
well placed to continue to take a meaningful share of
this growing market with evolving regulation set to
underpin the longer-term opportunity.
November’s acquisition of Leadscope provides further
regulatory-backed growth opportunities given that
a number of the world's major regulatory agencies,
including the FDA and the European Medicines
Agency, adopted a standard known as ICH M7 (R1)
for the assessment and control of DNA reactive
(mutagenic) impurities in pharmaceuticals to limit
potential carcinogenic risk.
Importantly, Leadscope is especially well-placed for
1 2
growth having worked extensively through research
collaboration agreements (“RCAs”) with the FDA, and
in collaboration with other agencies, to develop both
predictive and expert review solutions for ICH M7 (R1)
and has licensed the software widely in the industry.
S T U D Y M A N A G E M E N T
Instem’s focus here
is on automating processes
associated with pre-clinical and early phase clinical
study planning, data collection, analysis and reporting.
The move of long-standing clients to SaaS deployment
continued during the period while the addition of
a number of new clients utilising the SaaS model
contributed strongly to the changing revenue mix with
28% of the Company’s study management business
now aligned to this revenue model. Importantly, the
Company continues to work closely with its clients as
part of its carefully managed programme to transfer all
clients to a SaaS-dominated deployment model.
This area includes Instem’s market leading Provantis
product suite, which enjoyed record new client wins
with thirteen additional customers, nine of whom
chose SaaS deployment. Once again, growth was
particularly strong in the Asia-Pacific region, with nine
new Provantis clients.
I N F O R M A T I C S
Instem utilises a range of bioinformatics tools to
extract, analyse and compile actionable information
from across the R&D spectrum. The growing use of
AI, in particular across the Target Safety Assessment
(“TSA”) process, has driven the majority of growth in
this area.
Revenue from the Company's informatics services
grew rapidly during the period with a 101% increase
compared with the prior period.
Added to the strong organic growth, Instem completed
the earnings enhancing acquisition of Leadscope
Inc in November 2019, further extending its product
portfolio and cross-selling opportunities. Provided
on a subscription or pay-per-use basis, Leadscope's
software employs sophisticated artificial intelligence
and machine-learning algorithms to predict potential
safety outcomes and to enable scientists to perform
expert reviews. Deployed Software-as-a-Service, or on
client premises, Leadscope's software allows clients to
extract knowledge from both public data and their own
proprietary sources.
Importantly, Informatics brings Instem into contact
with customers at an early stage in the drug development
process, helping to cement client relationships through
its range of solutions.
R E G U L A T O R Y S O L U T I O N S
strong
submission, generated
The Company continued to benefit from FDA-driven
demand for SEND conversion work, with the industry
focused on addressing both the study backlog and
growing current study volume. Outsourced services,
whereby Instem leverages its technology to deliver
fully compliant SEND packages ready for electronic
regulatory
repeat
business.
With over fifty revenue generating SEND services
staff, Instem has by far the largest team in the industry
focused purely on SEND outsourcing. The team
comprises several of the world’s leading SEND experts,
who continue to contribute to the industry consortium
developing and maintaining the standard. Instem
has highly qualified SEND staff in Europe and North
America, close to the largest client concentrations,
but with around two thirds of the team in Instem’s
Pune, India office, which in aggregate provides a very
cost effective and scalable approach. This has enabled
Instem to grow SEND outsourced services revenue to
£4.5m in 2019 (2018: £2.8m).
Industry consolidation by the two dominant non-
clinical contract research organisations (“CROs”),
Charles River and Covance, who each has a strategy
to undertake SEND production in-house, is expected
to moderate growth in demand for SEND Services for
regulatory submission. However, with a significant
volume of SEND data sets now in existence, the
opportunity to use SEND for data exploitation is
growing and we expect that area of Instem’s solutions
suite to benefit.
I M P A I R M E N T O F G O O D W I L L
A N D O T H E R I N T A N G I B L E
A S S E T S
Although our Alphadas early phase clinical data
collection business performed well for the first few
years following the May 2013 acquisition of Logos
Technologies “Logos”, that sector of the pharmaceutical
development market has been going
through
considerable structural change, impacting many of
the contract research organisations that represent the
majority of the market opportunity. Consequently,
little new data collection software business has been
placed in this sector over the last 18 months.
Furthermore, it appears the early phase clinical
CROs have been negatively impacted by COVID-19.
We envisage further slippage in the pipeline of new
opportunities, with no certainty regarding the timing
of new business awards.
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S T R A T E G I C R E P O R T ( C O N T I N U E D )
We have therefore made a combined £3.2m impairment
provision (2018: £nil) to the goodwill arising on the
Logos acquisition (£2.5m) and to other intangible assets
related to our Alphadas business (£0.7m). We remain
committed to supporting our existing Alphadas clients
and to securing new business as suitable opportunities
arise. There is no impact from this to any other area of
our business, where end user markets remain robust.
F I N A N C I A L R E V I E W
Key Performance Indicators (KPIs)
The directors review monthly revenue and operating
costs to ensure that sufficient cash resources are
available for the working capital requirements of the
Group. Primary KPIs at the year end were:
12 mths to
31 Dec
2019
£000
12 mths to
31 Dec
2018
£000
Total revenue
25,717
22,705
Recurring revenue
14,862
13,669
Recurring revenue as a percentage
of total revenue
58%
60%
Adjusted EBITDA
4,864
Cash and cash equivalents
5,957
4,052
3,572
fees,
In addition, non-financial KPIs are periodically
reviewed and assessed, including customer retention
and staff retention rates.
Instem’s revenue model consists of perpetual licence
income with annual support and maintenance
contracts, professional
technology enabled
outsourced services fees and SaaS subscriptions.
Total revenues increased by 13% to £25.7m (2018:
£22.7m). Recurring revenue, derived from support
& maintenance contracts and SaaS subscriptions,
increased during the year by 9% to £14.9m (2018:
£13.7m). Recurring revenue as a percentage of total
revenue was 58% (2018: 60%). In absolute terms
recurring revenue increased over the prior year by
£1.2m but its percentage of the total decreased due to
the growth in technology enabled outsourced services,
which is currently all shown as non-recurring. Revenue
from technology enabled outsourced services increased
1 4
tax,
before
income/(costs), non-recurring
to £5.6m (2018: £3.3m). Operating expenses increased
by 12% in the period reflecting the ongoing investment
in operational teams. The revenue mix also attracted
higher direct costs linked to the higher revenue.
depreciation,
interest,
Earnings
amortisation, impairment of goodwill and capitalised
development and non-recurring
items (Adjusted
EBITDA) increased by 20% to £4.9m (2018: £4.1m). For
this measure of earnings, the margin as a percentage of
revenue increased in the year to 18.9% from 17.8% in
2018.
Non-recurring costs in the year included £0.2m of
acquisition costs linked to the purchase of Leadscope
Inc. and legal costs associated with historical contract
disputes of £0.1m (2018: £0.05m).
The reported loss before tax for the year was £0.9m
(2018: profit of £1.7m). Adjusted profit before tax (i.e.
adjusting for the effect of foreign currency exchange
on the revaluation of inter-company balances included
items,
in finance
impairment of goodwill and capitalised development
and amortisation of intangibles on acquisitions) was
£3.2m (2018: £2.8m).
The Group continues to maintain its investment in its
product portfolio. Development costs incurred during
the year were £3.1m (2018: £3.1m), of which £1.3m
(2018: £1.5m) was capitalised. The Group claimed
research and development tax credits in respect of
the prior year 2018 of £0.6m (2018 in respect of 2017:
£0.5m).
The Group acquired Leadscope Inc on 15 November
2019. The acquisition extends the Group’s currently
small but rapidly growing Informatics business.
The total consideration payable will be up to $4.7m,
satisfied by a combination of cash and new ordinary
shares in Instem plc. The consideration comprises
an initial $3.35m, $0.1m working capital adjustment
payable in Q1 2020, $0.75m of deferred consideration
payable in two equal instalments in November 2020
and November 2021 and up to a further $0.5m,
contingent upon the future financial performance of
Leadscope, which would be payable in H1 2022. The
initial consideration was satisfied in 2019 by $2.25m
in cash and $1.1m in new ordinary shares of 10 pence
each equating to 231,966 shares. The cash was funded
from existing resources.
In 2019 the Group has adopted new guidance for
the recognition of leases (note 7). The new standard
of £0.5m payable through to October 2024, by when
the funding liability is scheduled to be eliminated.
The deficit at the year-end of £1.8m (2018: £2.2m) is
represented by the fair value of assets of £12.0m (2018:
£10.4m) and the present value of funded obligations of
£13.8m (2018: £12.6m), after applying a discount rate
of 2.20% (2018: 3.00%).
has been applied using the modified retrospective
approach, with the cumulative effect of adoption as at
1 January 2019 being recognised as a single adjustment
to retained earnings. IFRS16 removes the operating
and finance lease classification in IAS17 Leases and
replaces them with the concept of right of use assets
and associated financial liabilities. This change results
in the recognition of a liability on the statement of
financial position for all leases which convey a right to
use the asset for the period of the contract. The lease
liability reflects the present value of the future rental
payments and interest, discounted using either the
effective interest rate or the incremental borrowing rate
of the entity. In 2019 the right of use assets recognised
were primarily the leases for the Company’s global
offices.
The change in accounting policy affected the following
items in the balance sheet on 1 January 2019:
• Right of use assets – increase by £3.002m
• Lease liabilities – increase by £3.042m
The net impact on retained earnings on 1 January 2019
was a decrease of £0.068m. Prior periods have not been
restated. For the year ended 31 December 2019, the
impact on adjusted EBITDA of adopting IFRS16 is an
increase of £0.7m. Amortisation of right of use assets
in the period amounted to £0.6m, with an interest
expense of £0.1m charged to finance costs.
Basic and diluted earnings per share calculated on an
adjusted basis were 19.3p and 18.4p respectively (2018:
16.4p basic and 15.5p diluted). The reported basic
and diluted earnings per share were (5.7p) and (5.7p)
respectively (2018: 9.2p basic and 8.7p diluted). The
diluted loss per share in 2019 is the same as basic loss
per share as losses have an anti-dilutive effect.
The period saw strong net cash generated from
operating activities of £5.4m (2018: £2.2m), largely due
to cash inflow from key contracts, outsourced services,
working capital management and a £0.5m R&D
tax credit claimed in respect of 2017. Cash balance
increased to £6.0m at 31 December 2019, compared
with £3.6m as at 31 December 2018, after making
the initial cash consideration for the acquisition of
Leadscope Inc from existing resources, net of cash
acquired, of £1.3m in the period.
The Group’s legacy defined benefit pension scheme has
remained closed to new members since October 2001.
The most recent comprehensive actuarial valuation
was carried out at 5 April 2017 and the next triennial
valuation will be calculated as at 5 April 2020. At 31
December 2019, the pension deficit decreased by
£0.4m to £1.8m (2018: £2.2m). The future agreed
cash contributions will remain around an annual level
1 5
S T R A T E G I C R E P O R T ( C O N T I N U E D )
The table below provides the data for certain performance measures mentioned above:
Annual support fees
SaaS subscription and support fees
2019
£000
8,418
6,444
2018
£000
8,160
5,509
Recurring revenue
14,862
13,669
Licence fees
Professional services
Technology enabled outsourced services
3,501
1,773
5,581
Total revenue
25,717
EBITDA
Non recurring costs (see note 3)
*Adjusted EBITDA
(Loss)/Profit before tax
Amortisation of intangibles arising on acquisition
Impairment of goodwill and capitalised development
Non recurring costs (see note 3)
Intercompany foreign exchange loss/(gain)
**Adjusted profit before tax
Tax
Adjusted profit after tax
Weighted average number of shares (000's)
Adjusted diluted earnings per share
Cash at bank
Bank overdraft
Cash balance
4,562
302
4,864
(901)
523
3,175
302
61
3,160
(22)
3,138
17,053
18.4p
14,955
(8,998)
5,957
3,491
2,204
3,341
22,705
3,513
539
4,052
1,677
788
-
539
(186)
2,818
(207)
2,611
16,849
15.5p
12,570
(8,998)
3,572
* Earnings before interest, tax, depreciation, amortisation, impairment of goodwill and capitalised development and
non-recurring costs.
**After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances
included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised development and
amortisation of intangibles on acquisitions.
1 6
U P D A T E O N H I S T O R I C A L
C O N T R A C T D I S P U T E
An historical contractual licence dispute, which does
not affect the ongoing operations of the Group, is in
the process of being heard by the German courts.
The initial hearing was held in early 2019. An expert
witness was appointed by the court to review the case
and report their findings. That report was submitted
to the court in January 2020 and the Company has
commented in response. The Company is defending
the action and strongly believes that the claim should
be dismissed. Notwithstanding this, the cost provision
made in 2017 has been maintained in the 2019 financial
statements. Further announcements will be made as
and when appropriate. To date all legal expenses have
been expensed.
P R I N C I P A L R I S K S A N D
U N C E R T A I N T I E S
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.
Foreign currency 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 main currency giving
rise to this risk is US dollars. The Group has both
cash inflows and outflows in this currency that create
a natural hedge. The Group also generates material
cash reserves through its Chinese subsidiary that are
not readily available to the UK Group at short notice
and, as such, the Group has to maintain sufficient
working capital headroom to accommodate any delays
in repatriating cash from China. 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 continually
assesses the most appropriate approach to managing
its currency exposure in line with the overall goal of
achieving predictable earnings growth. 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 £0.1m
(2018: £0.1m).
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
Group generates external revenue from no customers
which individually amount to more than 10% of the
Group revenue. At the 2019 year end the Group had a
maximum credit risk exposure of £6.9m (2018: £7.8m).
The amounts presented in the statement of financial
position are net of impairment provisions.
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 16 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 manages liquidity risk through
regular cash flow forecasting and monitoring through
management review, including a regular review of
working capital and costs. The Group’s principal costs
are staff related, that are primarily salaries and related
benefits paid monthly. The Group monitors daily its
available headroom under its borrowing facilities.
At 31 December 2019, its £0.5m net overdraft bank
facility was undrawn (2018: £0.5m facility undrawn).
This facility is provided to the Group by the Group’s
UK based bankers, with no other debt facilities in place
in any other global territories. The Group is focused
on repatriating as much cash to the UK as possible to
minimise the use of the facility, whilst ensuring there is
sufficient working capital available in each territory in
which it operates. The Group had positive cash reserves
of £6.0m at the 2019 year end, in addition to the £0.5m
undrawn working capital facility, although £1.9m of the
1 7
S T R A T E G I C R E P O R T ( C O N T I N U E D )
cash was held in bank accounts in China, where it has
been traditionally harder to repatriate funds quickly.
There are no long term restrictions on the transfer of
funds from the Group bank accounts in China.
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
2019, 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
2019 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).
Cyber risk
The Group handles much data electronically and is
therefore extremely aware of the risks that a cyber-
attack could have on its business. It has robust standards
in place for establishing and maintaining systems and
processes to ensure that the highest standards of data
protection are in place. This also applies to any third
party who is handling data on behalf of the Group and
its customers, such as third-party hosting providers.
Technology risk
Due to the evolving nature of technology platforms
there is a risk of obsolescence. The Group monitors this
risk and develops strategic development plans to ensure
it remains compliant with technological advances.
Acquisition risk
Any corporate acquisition has associated integration
risk. In respect of every acquisition the Group creates
an integration plan with assigned responsibilities to a
team led by an appointed project manager for delivering
against an agreed timetable. This is monitored closely
throughout the integration process and any deviations
against the plan are flagged and actioned accordingly.
Recruitment and retention risk
As its people are the Group’s major asset, it is critical
to ensure that it recruits the best staff possible and
that these individuals are rewarded and developed
appropriately. The Group has a global HR team that
manages the process of ensuring the staff benefit and
reward packages are incentivising for both recruitment
and retention purposes. This includes benchmarking
against peers and industry norms and considering staff
feedback through regular performance review. During
2020 the Group will be implementing an all-staff share
scheme for the first time.
Brexit
The UK withdrew from the EU on 31 January 2020 and
has entered a transition period until the end of 2020.
Trade negotiations with the EU are planned for 2020
and whilst the outcome remains uncertain, there is
always the associated risk of adverse implications for
the business, including the impact on exchange rate
fluctuations. However, the Group has to its knowledge
experienced no negative impact on its business to date
and does not expect to do so in the future. Instem
operates in a global market with a multinational
customer base and its revenues and costs spread around
the globe without over reliance on Europe or exposure
to it. The 2016 acquisition of Notocord in France
provides the Group with a presence in Europe that we
expect to help mitigate any impact that might arise
from the Brexit outcome. The Group will continue to
monitor the progress of the UK/EU trade negotiations
and any potential implications for the business.
Coronavirus (COVID-19)
Like most businesses worldwide the Group is having
to deal with the impact of COVID-19, with its primary
concern being for the safety and wellbeing of its
staff and their families. The Group has the benefit of
operating in a sector where significant worldwide focus
is on identifying vaccines and therapies for COVID-19,
with a number of our customers directly involved in
this work. While the Group expects some disruption
to demand for its products and services there is also
expected to be some increases in customer demand.
Whilst approximately half of the Group’s revenues
are generated from North America, the remaining
revenues are spread across the world and therefore
there is no dependence on one territory thus spreading
the risk. The Group benefits from having no supply
chain or distribution network to rely on. The Group
has the added benefit of having systems and processes
established to enable its workforce to work effectively
from home across all of its sites worldwide.
The Group continues to follow and adhere to the advice
1 8
of the government authorities in each territory in
which its staff are based. The situation is being closely
monitored with all appropriate and proportionate
measures taken wherever possible.
O U T L O O K
We are delighted with our performance during the
period, with our proven business model generating
improvements across all of our key performance
metrics. We have an established base from which to
grow, both organically and via acquisition, and have
established long-term relationships with our blue-chip
client base. Importantly, we are well positioned to add
new clients and generate increasing revenues from
existing clients while our transition to a SaaS model
increases visibility.
Increased revenue predictability and high retention
rates provide a strong foundation from which the
business can grow as it builds on the momentum
achieved during 2019. While some future uncertainty
inevitably remains, the majority of our revenue comes
from clients whose
laboratories are regarded as
“essential businesses” and therefore remain active, with
many working on COVID-19 related vaccines and
therapies. Consequently, we have remained very busy,
have good visibility over a strong H1 2020 performance
and continue to have confidence in the longer term
outlook for the business, supported by a strong cash
balance at the end of April 2020 of £8.3m. Our staff are
currently working effectively from home and are highly
motivated by the work that we are directly contributing
to COVID-19 research and development.
P J Reason
Chief Executive
2 June 2020
1 9
B O A R D O F D I R E C T O R S
Non-executive Chairman
Chief Executive Officer
D a v i d G a r e
P h i l R e a s o n
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 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.
2 0
Chief Financial Officer
Non-executive Director
Non-executive Director
N i g e l G o l d s m i t h
M i k e M c G o u n
D a v i d S h e r w i n
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 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.
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
device 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.
2 1
C O R P O R A T E G O V E R N A N C E S T A T E M E N T
In accordance with AIM Notice 50 issued by the
London Stock Exchange, 8 March 2018, the Group
has adopted the Corporate Governance Guidelines for
Small and Medium Size Quoted Companies published
by the Quoted Companies Alliance (the QCA Code).
The main features of the Group’s corporate governance
procedures, in relation to the 10 Principles of the QCA
Code, are set out in the full QCA Code Compliance at
https://investors.instem.com/corporate/governance.
php.
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.
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;
b.
c. 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
d. regular monitoring of key performance indicators
together with
(KPIs) and financial
comparison of these against expectations. KPIs
assessed are both financial and non-financial.
results
A U D I T C O M M I T T E E
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.
The Audit Committee undertook an audit tender
process during the year and Grant Thornton UK LLP
were appointed as auditors, replacing RSM UK Audit
LLP.
2 2
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 has met once during the year
and may meet at 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
including considering
the
the
external auditor
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;
c.
d. 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;
e. considers all major findings of internal operational
audit reviews and management's response to
internal and
ensure co-ordination between
external auditor;
reviews the Board's statement on internal reporting
systems and keeps the effectiveness of such systems
under review; and
f.
g. considers all other relevant findings and audit
programmes of the Group.
The Audit Committee is authorised to:
a.
investigate any activity within its terms of reference;
b. seek any information it requires from any employee
of the Group; and
c. 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.
A T T E N D A N C E A T B O A R D A N D C O M M I T T E E M E E T I N G S
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:
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
14/14
14/14
14/14
14/14
14/14
2/2
2/2
2/2
2/2
2/2
0/0
0/0
3/3
3/3
3/3
0/0
0/0
1/1
1/1
1/1
R E M U N E R A T I O N C O M M I T T E E
The Remuneration Committee comprises M F McGoun
(Chairman), D Gare and D M Sherwin, all of whom are
non-executive directors of the Company.
The members of the Remuneration Committee are
appointed by the Board on recommendation from
the Nomination Committee, in consultation with the
Chairman of the Remuneration Committee. The Chief
Executive Officer of the Group is normally invited to
meetings of the Remuneration Committee to discuss
the performance of other executive directors but is not
involved in any of the decisions. The Remuneration
Committee invites any person it thinks appropriate
to join the members of the Remuneration Committee
at its meetings. The Remuneration Committee meets
at least once a year and any other time as required by
either the Chairman of the Remuneration Committee
or the Chief Financial Officer of the Group.
The Remuneration Committee:
a. ensures that the executive directors are fairly
rewarded for their individual contributions to
the overall performance of the Group but also
ensures that the Group avoids paying more than is
necessary for this purpose;
b. 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;
c. 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
e. considers and makes recommendations to the
Board about the public disclosure of information
about
the executive directors' remuneration
packages and structures in addition to those
required by law or by the London Stock Exchange.
The Chairman of the Remuneration Committee
reports formally to the Board on its proceedings
after each meeting on all matters within its duties
and responsibilities. The Remuneration Committee
produces an annual report which is included in the
Group’s annual report and accounts.
The Remuneration Committee is authorised to:
a.
investigate any activity within its terms of reference;
b. seek any information it requires from any employee
of the Group;
c. 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.
2 3
C O R P O R A T E G O V E R N A N C E S T A T E M E N T ( C O N T I N U E D )
N O M I N A T I O N C O M M I T T E E
d.
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.
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 Nomination Committee
The Chairman of
reports formally to the Board on its proceedings after
each meeting on all matters within its duties and
responsibilities.
The Nomination
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;
also makes
Committee
c.
b. membership of the Audit and Remuneration
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;
2 4
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.
legal or other
The Nomination Committee is authorised to:
a.
investigate any activity within its terms of reference;
b. seek any information it requires from any employee;
independent
c. obtain outside
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.
d.
I N T E R N A L C O N T R O L S
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
T h e B o a r d
r e c o g n i s e s
i t s o v e r a l l
r e s p o n s i b i l i t y
f o r t h e G r o u p ’ s
s y s t e m s o f
i n t e r n a l
c o n t r o l a n d f o r
m o n i t o r i n g t h e i r
e f f e c t i v e n e s s .
C o r p o r a t e G o v e r n a n c e S t a t e m e n t
2 5
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T
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.
R E M U N E R A T I O N C O M M I T T E E
The Remuneration Committee (‘the Committee’) is
composed entirely of non-executive directors. The
Committee was formed upon the public listing of the
Company on 13 October 2010. The Chairman of the
Committee is M F McGoun. The terms of reference for
the Committee are to determine the Group’s policy on
executive remuneration and to consider and approve
the remuneration packages for directors and key
executives of the Group, subject to ratification by the
Board. During the year, the Committee met on two
occasions. Full details of the elements of each director’s
remuneration are set out on the following page. Details
of share-based payment are shown in note 8 to the
financial statements.
P O L I C Y O N E X E C U T I V E
D I R E C T O R R E M U N E R A T I O N
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.
B A S I C S A L A R Y
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.
P E R F O R M A N C E R E L A T E D
A N N U A L B O N U S
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 2019 (2018: £nil).
P E N S I O N S
Company contributions are made to the executive
directors’ personal pension schemes up to a maximum
of 16.5% of basic salary.
B E N E F I T S
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.
S E R V I C E C O N T R A C T S
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.
2 6
The emoluments paid or payable to directors in respect of the year ended 31 December 2019 were as follows:
Salary and Fees
Bonus
Benefits
Pension
2019 Total
2018 Total
Executives
P J Reason*
N J Goldsmith
Non-executives
D Gare
D M Sherwin
M F McGoun
223
115
60
30
30
Total
458
-
-
-
-
-
-
7
14
-
-
-
21
31
12
-
-
-
43
261
141
60
30
30
243
133
60
30
30
522
496
* The remuneration in respect of P J Reason is payable in US Dollars and translated at the average rates as disclosed on page 50.
The total remuneration paid in the year was USD 332,000 (2018: 324,000)
D I R E C T O R S ’ A N D E M P L O Y E E S ’ S H A R E O P T I O N S
Exercise price
(£)
Issue date
Held at 31
Dec 2018
Granted
during year
Exercised
during year
Lapsed
during year
Held at 31
Dec 2019
P J Reason
Ordinary shares
N J Goldsmith
Ordinary shares
Employees
Ordinary shares
1.750
0.900
0.100
NIL
2.215
1.760
0.900
0.100
NIL
1.750
2.220
2.220
0.900
0.100
0.100
0.100
0.100
0.100
NIL
0.100
0.100
13/10/2010
14/01/2013
29/07/2015
22/02/2018
29/11/2011
07/02/2012
14/01/2013
29/07/2015
22/02/2018
13/10/2010
03/03/2011
17/10/2011
14/01/2013
11/02/2015
29/07/2015
21/11/2015
27/05/2016
03/05/2017
22/02/2018
30/07/2018
22/02/2019
187,427
23,429
93,750
80,000
40,000
20,000
15,000
62,500
80,000
227,255
93,844
14,667
39,146
40,584
125,000
25,258
15,120
37,500
240,000
5,068
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,740
-
-
(93,750)
-
(40,000)
-
-
-
-
(176,541)
(93,844)
(6,000)
(16,171)
-
(46,875)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8,640)
-
-
(5,096)
(3,096)
187,427
23,429
-
80,000
290,856
-
20,000
15,000
62,500
80,000
177,500
50,714
-
8,667
22,975
40,584
78,125
25,258
6,480
37,500
240,000
-
4,644
514,947
Total
1,465,548
7,740
(473,181)
(16,804)
983,303
2 7
D I R E C T O R S ’ R E M U N E R A T I O N R E P O R T ( C O N T I N U E D )
On 13th February 2020 it was announced that a
member of the senior management team had exercised
share options over 50,714 ordinary shares of 10p each
in the Company.
In January 2020 the Group informed its staff of its
intention to implement an all-staff share and option
scheme. The scheme has subsequently been formally
launched with staff receiving the right to 386,686
ordinary shares of 10p each in the Company that will
vest in April 2023.
Approved by the Board and signed on its behalf by:
M F McGoun
Independent Non-Executive Director
2 8
D I R E C T O R S ' R E P O R T
The directors submit their report and the Group and
Company financial statements of Instem plc for the
year ended 31 December 2019.
Instem plc is a public limited company, incorporated
and domiciled in England, and quoted on AIM.
P R I N C I P A L A C T I V I T I E S
Instem is a leading supplier of IT applications to the
life sciences healthcare market, delivering compelling
solutions for data collection, management and analysis
across the R&D continuum. Instem applications are
in use by customers worldwide, meeting the rapidly
expanding needs of
life science and healthcare
organisations for data-driven decision making leading
to safer, more effective products.
Instem's portfolio of software solutions increases client
productivity by automating study-related processes
while offering the unique ability to generate new
knowledge through the extraction and harmonisation
of actionable scientific information.
R E V I E W O F T H E B U S I N E S S
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 and the Strategic Report on pages 10 to 19.
S T R A T E G I C R E P O R T
The Group has chosen in accordance with Companies
Act 2006, section 414C (11) to set out in the Group's
strategic report on pages 10 to 19 information required
to be contained in the Directors’ Report by Large and
Medium-sized Companies and Groups (Accounts and
Reports) Regulations 2008, Sch. 7, where not already
disclosed in the Directors’ Report.
D I R E C T O R S ’ R E S P O N S I B I L I T Y
U N D E R S E C T I O N 1 7 2
The Group’s response to the requirements of section
172 of the Companies Act 2006 is included within the
Strategic Report.
F U T U R E D E V E L O P M E N T S
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.
Like most businesses worldwide the Group is having
to deal with the impact of COVID-19, with its primary
concern being for the safety and wellbeing of its
staff and their families. The Group has the benefit of
operating in a sector where significant worldwide focus
is on identifying vaccines and therapies for COVID-19,
with a number of our customers directly involved in
this work. While the Group expects some disruption
to demand for its products and services there is also
expected to be some increases in customer demand.
Whilst approximately half of the Group’s revenues
are generated from North America, the remaining
revenues are spread across the world and so there is no
dependence on one territory thus spreading the risk.
The Group benefits from having no supply chain and
no distribution network to rely on and has the added
benefit of having systems and processes established
to enable its workforce to work effectively from home
across all of its sites worldwide.
The uncertainty as to the future impact on the Group of
the recent COVID-19 outbreak has been considered as
part of the Group’s adoption of the going concern basis.
Thus far we have not observed any material impact
on our overall existing business or in the level of new
business opportunities that are being presented to us in
the markets in which we operate. We have seen a little
slippage in customers placing new business during the
first quarter of 2020, but at this stage it is too early to
determine whether this is likely to be a long term issue
or merely a temporary matter whilst our customers
are focused on managing their own businesses, with
changes from introducing staff self-isolation and
working from home.
R E S E A R C H A N D D E V E L O P M E N T
A C T I V I T I E S
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.
2 9
D I R E C T O R S ’ R E P O R T ( C O N T I N U E D )
I N D E M N I T Y O F O F F I C E R S A N D
D I R E C T O R S
Under the Company’s Articles of Association and
subject to the provisions of the Companies Act, the
Group may and has indemnified all directors and other
officers against liability incurred in the execution or
discharge of their duties or the exercise of their powers,
including but not limited to any liability for the costs of
any legal proceedings. The Group has purchased and
maintains appropriate insurance cover against legal
action brought against directors or officers.
A N N U A L G E N E R A L M E E T I N G
The Annual General Meeting (‘AGM’) of the Company
will be held on 30 June 2020. The resolutions to be
proposed at the AGM, together with explanatory notes,
appear in a separate notice of AGM which is sent to all
shareholders. A proxy card for registered shareholders
is distributed along with the notice.
A U D I T O R
During the year Grant Thornton UK LLP were
appointed as auditor. Pursuant to s489 of the Companies
Act 2006, a resolution to re-appoint Grant Thornton as
auditor will be put to the members at the forthcoming
Annual General Meeting.
On behalf of the Board
P J Reason
Director
2 June 2020
D I V I D E N D S
The directors do not recommend the payment of a
dividend.
D I R E C T O R S
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 26 to 28.
D I R E C T O R S A N D T H E I R
I N T E R E S T S
The interests of the directors who held office at 31
December 2019 (2018: as at 25 April 2019) were as
follows:
2019
No. of Shares
2018
No. of Shares
D Gare
578,427
578,427
D M Sherwin
1,180,066
1,180,066
P J Reason
685,287
M F McGoun
N J Goldsmith
-
-
685,287
36,786
-
Directors’ interests in share options are detailed in the
Remuneration report on pages 26 to 28.
P O L I T I C A L D O N A T I O N S
The Group made no political donations in 2019 or
2018.
F I N A N C I A L I N S T R U M E N T S
The Group’s objectives and policies on financial
instruments are set out in note 22 to the financial
statements.
3 0
D I R E C T O R S ’ R E S P O N S I B I L I T Y S T A T E M E N T
The directors are responsible for preparing the
annual report in accordance with applicable law and
regulations. Having taken advice from the Audit
Committee, the directors consider the annual report
and the financial statements, taken as a whole, provides
the information necessary to assess the company’s
performance, business model and strategy and is fair,
balanced and understandable.
The directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the company’s website. Legislation in
the United Kingdom governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
The directors are responsible for preparing the
Strategic Report and Directors’ Report, the Directors’
Remuneration Report and the financial statements in
accordance with applicable law and regulations.
law requires the directors to prepare
Company
financial statements for each financial year. Under that
law the directors have elected to prepare the financial
statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the
European Union and applicable law. 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 and profit or loss of
the company and group for that period. In preparing
these financial statements, the directors are required to:
select suitable accounting policies and then apply
•
them consistently;
• make judgements and accounting estimates that
•
are reasonable and prudent;
state whether applicable IFRSs as adopted by the
European Union have been followed, subject to
any material departures disclosed and explained in
the financial statements;
• prepare the financial statements on the going
concern basis unless it is inappropriate to presume
that the company will continue in business.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the company and enable them to ensure that the
financial statements and the Directors’ Remuneration
report comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps
for the prevention and detection of fraud and other
irregularities.
The directors confirm that:
•
so far as each director is aware, there is no relevant
audit information of which the company’s auditor
is unaware; and
the directors 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 the company’s auditor is aware
of that information.
•
3 1
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F I N S T E M P L C
O P I N I O N
Our opinion on the financial statements is unmodified
We have audited the financial statements of Instem plc
(the ‘parent company’) and its subsidiaries (the ‘group’)
for the year ended 31 December 2019 which comprise
the Consolidated Statement of Comprehensive Income,
the Consolidated and Company Statements of Financial
Position, the Consolidated and Company Statements
of Cash Flows, the Consolidated and Company
Statements of Changes in Equity, the accounting
policies and notes to the financial statements. 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 2019 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.
•
•
•
B A S I S F O R O P I N I O N
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 the 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 listed entities and
we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that
3 2
the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
T H E I M P A C T O F
U N C E R T A I N T I E S A R I S I N G
F R O M T H E U K E X I T I N G T H E
E U R O P E A N U N I O N O N O U R
A U D I T
Our audit of the financial statements requires us to
obtain an understanding of all relevant uncertainties,
including those arising as a consequence of the
effects of Brexit. All audits assess and challenge the
reasonableness of estimates made by the directors and
the related disclosures and the appropriateness of the
going concern basis of preparation of the financial
statements. All of these depend on assessments of the
future economic environment and the group’s future
prospects and performance.
Brexit is one of the most significant economic events
for the UK, and at the date of this report its effects
are subject to unprecedented levels of uncertainty,
with the full range of possible outcomes and their
impacts unknown. We applied a standardised firm-
wide approach in response to these uncertainties when
assessing the group’s future prospects and performance.
However, no audit should be expected to predict the
unknowable factors or all possible future implications
for a group associated with a course of action such as
Brexit.
M A T E R I A L U N C E R T A I N T Y
R E L A T E D T O G O I N G C O N C E R N
We draw attention to the accounting policies, which
state that the uncertainty as to the future impact on
the group of the recent COVID-19 outbreak has been
considered as part of the group's adoption of the going
concern basis. In the downside scenario analysis
performed, the Board considered a more extreme
situation whereby the significant negative impact of
COVID-19 continued for an extended period of time
into 2021. This would result in the group exhausting
its cash reserves and exceeding its bank facility in
November 2020. As stated in the accounting policies,
these events or conditions, along with the other matters
as set forth therein indicate that a material uncertainty
exists that may cast significant doubt on the group’s
and parent company’s ability to continue as a going
concern. Our opinion is not modified in respect of this
matter.
of material misstatement (whether or not due to fraud)
that we identified. These matters included those that
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.
In addition to the matter described in the ‘material
uncertainty related to going concern’ section, we have
determined the matters described below to be the key
audit matters to be communicated in our report.
A U D I T W O R K P E R F O R M E D
To respond to risks relating to going concern, our
procedures evaluated management’s assessment of the
impact of COVID-19 on the group’s working capital by
performing the following procedures:
• Obtained management’s base case forecasts by
covering the period to May 2021. We assessed
how these forecasts were compiled and assessed
the appropriateness of management’s forecasts by
applying appropriate sensitivities to the underlying
assumptions which were also challenged;
• Assessed the accuracy of management’s forecasting
by comparing the reliability of past forecasts to the
base case forecast;
• Obtained management’s more extreme case
scenario prepared to assess the potential impact
of COVID-19. We evaluated the assumptions
regarding the impact of no new business, no hiring
of new staff and reduction in recurring revenue. We
considered whether the assumptions are consistent
with our understanding of the business derived
from other detailed work undertaken;
• Assessed the impact of the mitigating factors
available to management in respect of the ability to
restrict cash impact, including the level of available
facilities;
• Considered the forecasts prepared in respect of
the most likely impact of COVID-19 and whether
these still give rise to a material uncertainty; and
• Assessed the adequacy of related disclosures within
the Annual Report and Financial Statements.
O V E R V I E W O F O U R A U D I T
A P P R O A C H
• Overall materiality: £257,000, which represents 1%
of the group’s revenues
• Key
audit matters were
as:
The revenue cycle includes the risk of fraudulent
transactions and the carrying value of the group’s
goodwill and acquired intangibles
identified
• We performed full scope audit procedures on
the financial information of the significant group
components, including Instem Plc (the parent
company) and specified or analytical procedures
on the financial statements of the non-significant
components.
Key audit matters are those matters that, in our
professional judgement, were of most significance in
our audit of the financial statements of the current
period and include the most significant assessed risks
3 3
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F I N S T E M P L C ( C O N T I N U E D )
K EY AU D I T M AT T E R
– G R OU P
HOW T H E M AT T E R WA S A D D R E S SE D
I N T H E AU D I T – G R OU P
Our audit work included, but was not restricted to:
• Assessing the group’s accounting policies to
confirm compliance with IFRS 15
‘Revenue
from Contracts with Customers’, following prior
year implementation, and in particular, that any
transition adjustments have been appropriately
disclosed in respect of the newly acquired group
component, Leadscope Inc;
revenue
• Undertaking analytical procedures on monthly
recurring
incorrectly
to
classified non-recurring or service revenue;
investigating movements outside of expectation
and corroborating responses from management to
supporting documentation;
identify
• Testing a sample of revenue to customer contracts,
to determine whether the revenue has been
recognised in accordance with the terms of the
contract;
• Testing a sample of service revenue contracts,
focusing on contracts which remain open at the
year end. We performed recalculations of the
element of service revenue to be recognised as
completed, and any accrued or deferred income
balances at the year end. For each contract selected
we then tested the occurrence and accuracy of
revenue recognised during the year by agreeing to
supporting documentation; and
• Testing of cut off across all revenue streams on
an individual component basis by confirming
the appropriate allocation of sales to the correct
period. Proof of revenue occurrence was obtained
by agreeing to proof of delivery.
The group’s accounting policy on revenue recognition
is shown on pages 48-49 in the financial statements and
related disclosures are included in note 1.
Key observations
No material misstatement was identified as a result of
the work performed.
The revenue cycle includes the risk of fraudulent
transactions
The group’s revenue totaled £25.7m for the year ended
31 December 2019 (2018: £22.7m).
There is a risk that revenue has been misstated through
fraudulent entries and due to the complexity of the
revenue streams there is a risk that revenue recognition
criteria is not being properly applied.
in
is a management
There
determining the amount of revenue that is accrued at
year end (service revenue) and it is unpredictable in
nature (non-recurring revenue). We consider the risk
to be heightened around non-recurring revenue and
service revenue and this has formed the focus of our
work.
This is considered to be a key audit matter given the
importance of reported revenue to key stakeholders.
We therefore identified this risk as a significant risk,
which was one of the most significant assessed risks of
material misstatement.
judgement
involved
3 4
K EY AU D I T M AT T E R
– G R OU P
HOW T H E M AT T E R WA S A D D R E S SE D
I N T H E AU D I T – G R OU P
Carrying value of the group’s goodwill and acquired
intangibles
The group carried £14.4m of goodwill and acquired
intangibles in its consolidated statement of financial
position at 31 December 2019 (2018: £13.5m).
The group has material levels of intangible assets arising
from previous business combinations. The judgements
made in respect of the valuation of the intangible
assets and the impairment review comprise significant
measurement uncertainty. As a consequence, there
is a significant risk that these are impaired and their
carrying value written down.
The group has undertaken an acquisition, Leadscope
Inc during the year and performed an assessment of
the nature and value of the intangible assets acquired in
the business combination. The techniques involved in
valuing these assets require a high degree of judgment,
with estimates including future sales and discount
rates.
We therefore identified carrying value of the group’s
goodwill and acquired intangibles as a significant risk,
which was one of the most significant assessed risks of
material misstatement.
Our audit work included, but was not restricted to:
• Evaluating the group’s accounting policies to
determine their compliance with the requirements
of International Accounting Standard (IAS) 38
‘Intangible Assets’ and IAS 36 ‘Impairment of
Assets’;
• Consideration of the accounting for the business
combination in the period including assessment
of the fair value of consideration and net assets
acquired;
• Challenging the appropriateness of management’s
assumptions and sensitivities, including the growth
rate and discount rate used to assess the level of
headroom;
• Assessing and challenging the carrying value of
goodwill and acquired intangibles in management’s
impairment assessments. Our challenge focused
around the assumptions regarding future revenues
from the underlying cash generating unit relative
to historic performance, including whether the
supporting cash flow forecasts are in accordance
with Board forecasts; and
• Assessing whether the group’s disclosures are
adequate and key assumptions are disclosed.
The group’s accounting policy on goodwill and
intangibles is shown on page 52 in the financial
statements and related disclosures are included in note
12.
Key observations
As a result of our work, we concluded that the carrying
value of the group’s goodwill and acquired intangibles
was acceptable, including the recognition of the
impairment charge in the year.
There are no key audit matters in relation to the parent
company.
3 5
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F I N S T E M P L C ( C O N T I N U E D )
O U R A P P L I C A T I O N O F M A T E R I A L I T Y
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in
determining the nature, timing and extent of our audit work and in evaluating the results of that work.
Materiality was determined as follows:
Materiality measure
Group
Parent
Financial statements as a whole
£257,000 which is 1% of group revenue.
Revenue is considered a key driver of the
business performance and therefore considered
an appropriate benchmark on which to base
materiality.
£133,000, which is 1% of parent company
total assets, capped by component materiality.
Total assets is considered the most appropriate
because the parent company does not trade
and largely holds investments in the subsidiary
entities.
Performance materiality used to drive the extent
of our testing
70% of financial statement materiality.
70% of financial statement materiality.
Specific materiality
We also determine a lower level of specific
materiality for certain areas such as directors’
remuneration and related party transactions.
We also determine a lower level of specific
materiality for certain areas such as directors’
remuneration and related party transactions.
Communication of misstatements to the audit
committee
£12,850 and misstatements below that threshold
that, in our view, warrant reporting on
qualitative grounds.
£9,750 and misstatements below that threshold
that, in our view, warrant reporting on
qualitative grounds.
The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for
potential uncorrected misstatements.
Overall materiality – Group
Overall materiality – Parent
30%
30%
70%
70%
Tolerance for potential uncorrected mis-statements
Performance materiality
3 6
A N O V E R V I E W O F T H E S C O P E
O F O U R A U D I T
Our audit approach was a risk-based approach founded
on a thorough understanding of the group’s business,
its environment and risk profile and in particular
included:
•
evaluation by the group audit team of identified
components to assess the significance of that
component and to determine the planned audit
response based on a measure of materiality
calculated by considering
the component’s
significance as a percentage of the group’s total
assets, revenues and profit before taxation;
a full-scope audit of the financial information of
the parent company, Instem plc;
full scope audit procedures on the financial
information of seven of the group’s components.
The components on which full scope audits
were performed were selected based upon their
significance to the group’s assets, revenues and
EBITDA
•
•
• our full scope and specific procedures comprised
coverage of 100% of total revenue, 86% of EBITDA
and 90% of total assets; Instem Clinical Holdings
Limited, Instem Scientific Solutions Limited and
Instem Life Science Systems Limited have been
audited to group materiality as Instem Plc have
provided a parental guarantee as disclosed on page
45 in the accounts;
•
• performance of specific and analytical procedures
on non-significant components in the group;
an evaluation of significant management estimates
and judgements;
an assessment of material accounting policies
for compliance with the financial reporting
framework; and
all audit work has been undertaken by the group
audit team at the group head office in Stone.
•
•
O T H E R I N F O R M A T I O N
The directors are responsible for the other information.
The other information comprises the information
included in the report and financial statements, 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.
O U R O P I N I O N O N O T H E R
M A T T E R S P R E S C R I B E D B Y
T H E C O M P A N I E S A C T 2 0 0 6 I S
U N M O D I F I E D
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.
•
M A T T E R S O N W H I C H W E A R E
R E Q U I R E D T O R E P O R T U N D E R
T H E C O M P A N I E S A C T 2 0 0 6
In the light of the knowledge and understanding of the
group and the parent company and its environment
obtained in the course of the audit, we have not
identified material misstatements in the strategic
report or the directors’ report.
M A T T E R S O N W H I C H W E A R E
R E Q U I R E D T O R E P O R T B Y
E X C E P T I O N
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.
3 7
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
T O T H E M E M B E R S O F I N S T E M P L C ( C O N T I N U E D )
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.
Michael Frankish
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
Manchester
2 June 2020
R E S P O N S I B I L I T I E S O F
D I R E C T O R S F O R T H E
F I N A N C I A L S T A T E M E N T S
As explained more fully in the directors’ responsibility
statement, set out on page 31, 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.
A U D I T O R ’ S R E S P O N S I B I L I T I E S
F O R T H E A U D I T O F T H E
F I N A N C I A L S T A T E M E N T S
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.
A further description of our responsibilities for the
audit of the financial statements is located on the
Financial Reporting Council’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
U S E O F O U R R E P O R T
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
3 8
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
For the year ended 31 December 2019
Year ended
31 December
2019
£000
Year ended
31 December
2018
£000
Note
REVENUE
Employee benefits expense
Other expenses
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION
AND NON-RECURRING COSTS (ADJUSTED EBITDA)
Depreciation
Amortisation of intangibles arising on acquisition
Amortisation of internally generated intangibles
Amortisation of right of use assets
Impairment of goodwill and capitalised development
(LOSS)/PROFIT BEFORE NON-RECURRING COSTS
Non-recurring costs
(LOSS)/PROFIT AFTER NON-RECURRING COSTS
Finance income
Finance costs
1
2
2
14
12
12
7
12
2
3
4
5
(LOSS)/PROFIT BEFORE TAXATION
Taxation
10
(LOSS)/PROFIT FOR THE YEAR
OTHER COMPREHENSIVE INCOME/(EXPENSE)
Items that will not be reclassified to profit and loss account:
Actuarial gain on retirement benefit obligations
Deferred tax on actuarial gain
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations
OTHER COMPREHENSIVE (EXPENSE)/INCOME FOR THE YEAR
TOTAL COMPREHENSIVE (EXPENSE)/INCOME FOR THE YEAR
(LOSS)/PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY
TOTAL COMPREHENSIVE (EXPENSE)/INCOME ATTRIBUTABLE TO OWNERS OF THE
PARENT COMPANY
The notes on pages 58 to 99 form part of these financial statements.
Earnings per share
Basic
Diluted
27
27
25,717
(13,609)
(7,244)
4,864
(155)
(523)
(755)
(607)
(3,175)
(351)
(302)
(653)
7
(255)
(901)
(22)
(923)
30
(6)
24
(208)
(184)
(1,107)
(923)
(1,107)
(5.7p)
(5.7p)
22,705
(12,436)
(6,217)
4,052
(144)
(788)
(738)
-
-
2,382
(539)
1,843
33
(199)
1,677
(207)
1,470
1,300
(221)
1,079
(193)
886
2,356
1,470
2,356
9.2p
8.7p
3 9
C O N S O L I D A T E D S T A T E M E N T O F F I N A N C I A L P O S I T I O N
At 31 December 2019
Company Registration No. 07148099
Note
£000
£000
£000
£000
2019
2018
ASSETS
NON-CURRENT ASSETS
Intangible assets
Property, plant and equipment
Right of use assets
Finance lease receivables
TOTAL NON-CURRENT ASSETS
CURRENT ASSETS
Inventories
Trade and other receivables
Finance lease receivables
Tax receivable
Cash and cash equivalents
TOTAL CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Trade and other payables
Deferred income
Tax payable
Financial liabilities
Lease liabilities
Deferred tax liabilities
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Financial liabilities
Retirement benefit obligations
Provision for liabilities
Lease liabilities
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Merger reserve
Share based payment reserve
Translation reserve
Retained earnings
12
14
7
7
15
16
7
20
17
18
19
10
21
7
23
21
24
25
7
26
28
28
28
28
28
18,108
237
2,165
175
36
6,921
39
1,158
5,957
2,662
8,942
404
301
565
506
559
1,804
250
2,004
1,662
13,135
2,432
654
82
(1,166)
17,411
300
-
-
20,685
17,711
14,111
34,796
13,380
4,617
17,997
37
7,807
-
1,013
3,572
2,156
8,625
401
34
-
12
18
2,249
250
-
1,592
12,535
1,598
1,010
290
(630)
12,429
30,140
11,228
2,517
13,745
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
TOTAL EQUITY AND LIABILITIES
16,799
34,796
16,395
30,140
The financial statements on pages 39 to 99 were approved by the board of directors and authorised for issue on 2 June 2020 and
are signed on its behalf by:
P J Reason
Director
N J Goldsmith
Director
4 0
C O M P A N Y S T A T E M E N T O F F I N A N C I A L P O S I T I O N
At 31 December 2019
Company Registration No. 07148099
2019
2018
Note
£000
£000
£000
£000
ASSETS
NON-CURRENT ASSETS
Investments
13
26,192
28,927
TOTAL NON-CURRENT ASSETS
26,192
28,927
CURRENT ASSETS
Trade and other receivables
Cash and cash equivalents
16
17
5,001
1,128
3,131
643
TOTAL CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
6,129
32,321
Trade and other payables
18
6,659
4,595
TOTAL CURRENT LIABILITIES
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Merger reserve
Share based payment reserve
Retained earnings
26
28
28
28
28
1,662
13,135
14,066
654
(3,855)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
TOTAL EQUITY AND LIABILITIES
6,659
6,659
25,662
32,321
1,592
12,535
13,232
1,010
(263)
3,774
32,701
4,595
4,595
28,106
32,701
As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own statement of com-
prehensive income and related notes. The Company’s loss for the year was £4,023,000 (2018: £89,000).
The notes on pages 58 to 99 form part of these financial statements.
The financial statements on pages 39 to 99 were approved by the board of directors and authorised for issue
on 2 June 2020 and are signed on its behalf by:
P J Reason
Director
N J Goldsmith
Director
4 1
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
For the year ended 31 December 2019
Note
£000
£000
£000
£000
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss)/profit before taxation
Adjustments for:
Depreciation
Amortisation of intangibles
Amortisation of right of use assets
Impairment of goodwill and capitalised development
Share based payment charge
Retirement benefit obligations
Finance income
Finance costs
CASH FLOWS FROM OPERATIONS BEFORE MOVEMENTS IN
WORKING CAPITAL
Movements in working capital:
Decrease/(Increase) in inventories
Decrease in trade and other receivables
Increase/(Decrease) in trade, other payables and deferred income
NET CASH GENERATED FROM OPERATIONS
Finance income
Finance costs
Income taxes
NET CASH GENERATED FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalisation of development costs
Purchase of property, plant and equipment
Payment of contingent consideration
Purchase of subsidiary undertakings (net of cash acquired)
14
12
7
12
2
24
4
5
4
5
12
14
(901)
155
1,278
607
3,175
75
(475)
(7)
255
4,162
1
790
693
5,646
7
(255)
25
5,423
1,677
144
1,526
-
-
216
(499)
(33)
199
3,230
(7)
1,997
(3,448)
1,772
33
(11)
408
2,202
(1,344)
(91)
-
(1,268)
(1,490)
(145)
(200)
-
NET CASH USED IN INVESTING ACTIVITIES
(2,703)
(1,835)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
Lease interest payment
Repayment of lease liabilities
Receipts from sublease of asset
7
7
Repayment of lease capital
648
(2)
(693)
7
(34)
50
(4)
-
-
(31)
NET CASH GENERATED FROM FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at start of year
Effects of exchange rate changes on the balance of cash held in foreign
currencies
CASH AND CASH EQUIVALENTS AT END OF YEAR
17
(74)
2,646
3,572
(261)
5,957
15
382
3,064
126
3,572
The notes on pages 58 to 99 form part of these financial statements.
4 2
C O M P A N Y S T A T E M E N T O F C A S H F L O W S
For the year ended 31 December 2019
Note
2019
2018
£000
£000
£000
£000
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before taxation
(4,023)
Adjustments for:
Finance income
Finance cost
Impairment of investment
13
CASH FLOWS USED IN OPERATIONS BEFORE
MOVEMENTS IN WORKING CAPITAL
Movements in working capital:
Increase in trade and other receivables
Increase in trade and other payables
NET CASH USED IN OPERATIONS
Finance income
Finance costs
NET CASH USED IN OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Payment of deferred consideration
-
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
648
NET CASH GENERATED FROM FINANCING
ACTIVITIES
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at start of year
CASH AND CASH EQUIVALENTS AT END OF YEAR
17
The notes on pages 58 to 99 form part of these financial statements.
-
243
2,810
(970)
(1,014)
2,064
80
-
(243)
(163)
-
648
485
643
1,128
(89)
(81)
20
-
(150)
(885)
719
(316)
81
(8)
(243)
(200)
50
(393)
1,036
643
(200)
50
4 3
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N E Q U I T Y
ATTRIBUTABLE TO OWNERS OF THE COMPANY
Share
capital
£000
Share
premium
£000
Merger
reserve
£000
Shares
based
payment
reserve
£000
Translation
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance as at 1 January 2018
1,589
12,488
1,598
794
Profit for the year
Other comprehensive (expense)/income for
the year
Total comprehensive (expense)/income
Shares issued
Share based payment
-
-
3
-
-
-
-
47
-
-
-
-
-
-
Balance at 31 December 2018
1,592
12,535
1,598
Adjustment on initial application of IFRS 16
-
-
-
-
-
-
-
216
1,010
-
Adjusted balance as at 1 January 2019
1,592
12,535
1,598
1,010
Profit for the year
Other comprehensive income/(expense) for
the year
Total comprehensive (expense)/income
Shares issued
Share based payment
Reserve transfer on exercise of share options
-
-
-
70
-
-
-
-
-
-
-
-
600
834
-
-
-
-
-
-
-
-
75
(431)
483
-
(193)
(193)
-
-
290
-
290
-
(208)
(208)
-
-
-
(3,179)
13,773
1,470
1,079
2,549
-
-
(630)
(68)
(698)
(923)
24
1,470
886
2,356
50
216
16,395
(68)
16,327
(923)
(184)
(899)
(1,107)
-
-
431
1,504
75
-
Balance as at 31 December 2019
1,662
13,135
2,432
654
82
(1,166)
16,799
C O M P A N Y S T A T E M E N T O F C H A N G E S I N E Q U I T Y
ATTRIBUTABLE TO OWNERS OF THE COMPANY
Share
capital
£000
Share
premium
£000
Merger
reserve
£000
Share based
payment
reserve issued
£000
Retained
earnings
£000
Balance as at 1 January 2018
1,589
12,488
13,232
794
Loss for the year
Shares issued
Share based payment
-
3
-
-
47
-
-
-
-
Balance as at 31 December 2018
1,592
12,535
13,232
Loss for the year
Shares issued
Share based payment
Reserve transfer on exercise of share options
-
70
-
-
-
600
-
-
-
834
-
-
Total
equity
£000
27,929
(89)
50
216
28,106
(4,023)
1,504
75
-
(174)
(89)
-
-
(263)
(4,023)
-
-
-
-
216
1,010
-
-
75
(431)
431
Balance as at 31 December 2019
1,662
13,135
14,066
654
(3,855)
25,662
The notes on pages 58 to 99 form part of these financial statements.
4 4
A C C O U N T I N G P O L I C I E S
G E N E R A L I N F O R M A T I O N
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.
S T A T E M E N T O F C O M P L I A N C E
The financial statements of the Group and Company
have been prepared in accordance with International
Financial Reporting Standards (IFRS’s), as adopted
for use in the European Union, IFRS Interpretation
Committee (IFRIC) interpretations, issued by the
International Accounting Standards Board (IASB), and
the Companies Act 2006.
B A S I S O F P R E P A R A T I O N
The Group’s accounting reference date is 31 December.
The consolidated financial statements have been
prepared on a going concern basis and prepared on the
historical cost basis.
The Company has taken advantage of the audit
exemption for three of its subsidiaries, Instem Life
Science Systems Limited (company number 04339129),
Instem Scientific Solutions Limited (company number
03598020) and Instem Clinical Holdings Limited
(company number 05840032), by virtue of s479A of
Companies Act 2006. The Company has provided
parent guarantees to these three subsidiaries which
have taken advantage of the exemption from audit.
Under this guarantee, the Company has a contingent
liability of £9.0m.
The accounting policies set out below have, unless
otherwise stated, been applied consistently to all years
presented in these consolidated financial statements.
A D O P T I O N O F I F R S
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 2019.
The Group and Company have chosen not to adopt any
amendments or revised standards early.
I F R S s A D O P T E D I N T H E Y E A R
The following IFRSs, IASs and IFRICs have been
adopted for the first time in the year:
The Group has adopted IFRS 16 Leases from 1 January
2019 using the modified retrospective approach and
has not restated comparatives for the 2018 reporting
period as permitted under the specific transition
provisions in the standard.
On adoption of IFRS 16, the Group recognised lease
liabilities on the statement of financial position in
relation to leases which had previously been classified
as ‘operating leases’ under the principles of IAS 17
Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted
using the lessee’s incremental borrowing rate as of 1
January 2019. The weighted average lessee’s incremental
borrowing rate applied to the lease liabilities on 1
January 2019 was 4.0%. For longer leases of over 5 years
a discount rate of 5% has been applied. Any prepaid or
accrued lease payments relating to leases recognised in
the statement of financial position as at 31 December
2018 have been adjusted against the value of right of
use assets as at the 1 January 2019.
Instead of recognising an operating expense for its
operating lease payments, the Group now instead
liabilities and
lease
interest on
recognises
amortisation on its right of use assets.
Right of use assets increased by £3,002,000 on 1 January
2019, comprising land & buildings of £2,978,000 and
motor vehicles of £24,000. Lease liabilities for land &
buildings on 1 January 2019 are £3,020,000 and motor
vehicles £22,000. The net impact on retained earnings
on 1 January 2019 was a decrease of £68,000.
In applying the modified retrospective approach, the
Group has taken advantage of the following practical
expedients:
• A single discount rate has been applied to portfolios
of leases with reasonably similar characteristics.
Impairment losses on right of use assets as at 1
January 2019 have been measured by reference
to the amount of any onerous lease provision
recognised on 31 December 2018.
its
•
4 5
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
• Leases with a remaining term of 12 months or less
from the date of initial application have not been
recognised on the statement of financial position
with payments instead recognised as an expense
over the lease term on a straight-line basis,
• The Group has not reassessed whether contracts
are, or contain, a lease as at the date of initial
application. The Group has therefore not applied
the requirements of IFRS 16 to contracts that were
not previously identified as containing a lease
under IAS 17 and IFRIC 4.
• For the purposes of measuring the right of use
asset hindsight has been used. Therefore, it has
been measured based on prevailing estimates at the
date of initial application and not retrospectively.
Management have concluded that the interest rate
implicit in the leases cannot not be readily determined
therefore the leases held have been discounted by the
incremental borrowing rate (IBR), being the rate of
interest that the Group would have to pay to borrow
over a similar term, and with a similar security, the
funds necessary to obtain assets of a similar value to the
right of use assets in a similar economic environment.
I F R S s I S S U E D B U T N O T Y E T
E F F E C T I V E
There are a number of standards, amendments to
standards, and interpretations which have been issued
by the IASB that are effective in future accounting
periods that the Group has decided not to adopt early.
The most significant of these is are as follows, which are
all effective for the period beginning 1 January 2020:
•
IAS 1 Presentation of Financial Statements and
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors (Amendment – Definition of
Material)
IFRS 3 Business Combinations (Amendment –
Definition of Business)
•
• Revised Conceptual Framework for Financial
Reporting
These standards are not expected to have a material
impact on the entity in the current or future reporting
periods and on foreseeable future transactions.
B A S I S O F C O N S O L I D A T I O N
The consolidated financial statements incorporate those
of the parent company, Instem plc, and its subsidiary
4 6
undertakings made up to 31 December 2019 and 31
December 2018.
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 in which the Group has rights to
variable returns from its involvement with the investee
and has the ability to affect those returns through its
power over the investee. Subsidiaries are consolidated
from the date on which control is transferred to the
Group up until the date that control ceases.
All subsidiary companies within the Group have
a financial year end date of 31 December, with the
exception of Instem India Pvt Limited which has a
financial year end date of 31 March.
B U S I N E S S C O M B I N A T I O N S
Acquisitions of businesses are accounted for using the
acquisition method. The consideration transferred in a
business combination is measured at fair value, which
is calculated as the sum of the acquisition date fair
values of the assets transferred by the Group, liabilities
incurred by the Group to the former owners of the
acquiree and the equity interests issued by the Group
in exchange for control of the acquiree. Acquisition
related costs are recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired
and the liabilities assumed are recognised at their fair
value, except that deferred tax assets or liabilities are
recognised and measured in accordance with IAS 12
‘Income taxes’.
Consideration may consist of deferred consideration
and contingent consideration. Deferred consideration
is not based on any performance related conditions
and is payable on an agreed future date. Contingent
consideration is based on certain performance related
conditions and payable on an agreed future date, if
those conditions are met.
Deferred consideration and contingent consideration
is measured at their acquisition-date fair value
and are taken into account in the determination of
goodwill. Changes in the fair value of the contingent
consideration that qualify as measurement period
are
adjusted
adjustments
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
statement of comprehensive income.
G O I N G C O N C E R N
The financial position of the Group, its cash flows and
liquidity position are set out in the primary statements
within these financial statements.
The Group's financing arrangements consist of a
committed net overdraft facility of £0.5m with NatWest
Bank plc to support the Group's working capital needs.
At 31 December 2019 the facility was undrawn (2018:
undrawn). There are no material covenants associated
with the facility.
In November 2019 the Company acquired the earnings
enhancing, cash generative business of Leadscope Inc,
the results of which are included in the Group's forecast
cash flows for 2020 and beyond. The only financial
obligation associated with this acquisition during 2020
is a deferred consideration payment of $0.4m due in
November 2020.
The Group's detailed forecasts and projections, taking
account of reasonably possible changes in trading
performance through sensitivity analysis, show that
the Group has adequate resources to be able it to
continue in operation for at least twelve months from
the approval date of these Consolidated Financial
Statements. Accordingly, the Group continues to adopt
the going concern basis in preparing its Consolidated
Financial Statements.
The uncertainty as to the future impact on the Group of
the recent COVID-19 outbreak has been considered as
part of the Group's adoption of the going concern basis.
Thus far we have not observed any material impact
on our overall existing business or in the level of new
business opportunities that are being presented to us in
the markets in which we operate. We have seen a little
slippage in customers placing new business during the
first quarter of 2020, but at this stage it is too early to
determine whether this is likely to be a long term issue
or merely a temporary matter whilst our customers
are focused on managing their own businesses, with
changes from introducing staff self-isolation and
working from home.
The Group has a significant proportion of recurring
revenue (circa 60% of total) from annual support
& maintenance and SaaS contracts from a well-
established global customer base. Experience from
the last financial crisis showed there was no material
increase in recurring revenue attrition, although annual
inflationary increases were harder to secure. Revenue
is supported by a largely fixed cost base comprising
staff and offices.
The Group had net current assets (excluding deferred
income) of £10.0m at 31 December 2019 (2018: £9.8m).
The deferred income recurs each year on renewal of
contracts and in general the Group has either received
the related cash or has raised invoices for the services.
The Group had positive cash reserves of £6.0m at the
2019 year end, in addition to the £0.5m undrawn
working capital facility, although £1.9m of the cash
was held in bank accounts in China, where it has been
traditionally harder to repatriate funds quickly. There
are however no long-term restrictions on the transfer
of funds from the Group bank accounts in China.
In the downside scenario analysis performed, the Board
has considered the potential impact of the COVID-19
outbreak on the Group's results. In preparing this
analysis the following key assumptions were used: the
impact of a 25% loss of new business for the next twelve
months, no hiring of new staff for twelve months and
a weakening of the USD against GBP. This resulted
in reduced profitability and cash over the next twelve
months, but the Company remained viable. We then
considered a more extreme situation, if the significant
negative impact of COVID-19 continued for an
extended period of time into 2021. We assumed there
would be no new business. and up to 25% erosion of
the existing customer base for recurring revenues.
This would result in the Company exhausting its cash
reserves and exceeding its bank facility in November
2020.
The Company would take remedial action to counter
the dramatic reduction in profit and cash through a cost
cutting and fund-raising exercise that would include
staff redundancies, general cost control measures,
office space reduction and seeking alternative sources
of funding from banks and investors.
These downside scenarios are considered unlikely.
However, it is difficult to predict the overall impact
and outcome of COVID-19 at this stage, particularly
if there was a second wave towards the end of 2020.
The Board acknowledges that based on the difficulty in
determining when sufficient relief funding may become
available and when the full benefit of cost cutting
measures is realised there is material uncertainty in
the Group's future as a result of a long-term negative
impact of the COVID-19 pandemic.
4 7
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
that
concluded
The directors have
current
circumstances represent a material uncertainty that
may cast significant doubt upon the company's ability
to continue as a going concern and, therefore, that
it may be unable to realise its assets and discharge
its liabilities in the ordinary course of business.
Nevertheless, after making enquiries, and considering
the uncertainties described above, the directors have a
reasonable expectation that the company has adequate
resources to continue in operational existence for the
foreseeable future. For these reasons, they continue to
adopt the going concern basis in preparing the annual
report and accounts.
R E V E N U E R E C O G N I T I O N
the
services
inception,
technology
transaction price
The Group generates revenue from the provision of
software licences, annual support, SaaS subscriptions,
professional
enabled
and
outsourced services.
At contract inception, an assessment is completed to
identify the performance obligations in each contract.
Performance obligations in a contract are either goods
or services that are distinct or part of a series of goods
or services that are substantially the same and have the
same pattern of transfer to the customer. Promises
that are not distinct are combined with other promised
goods or services in the contract, until a performance
obligation is satisfied.
At contract
is
determined, being the amount that the Group expects
to receive for transferring the promised goods or
services. The transaction price is allocated to the
performance obligations in the contract based on
their relative standalone selling prices. The Group
has determined that the contractually stated price
represents the standalone selling price for each
performance obligation.
Revenue is recognised when a performance obligation
has been satisfied by transferring the promised product
or service to the customer.
Software licences
Revenue from the sale of the software licences is
recognised when the customer takes possession of
the software which is usually when the license key is
provided to the customer. This is because the software
is functional at the time the licence transfers to the
customer and the Group is not required or expected to
undertake activities that significantly affect the utility
of the intellectual property by the customer.
Annual support
Customers typically enter into a support contract for
a period of twelve months. This contract provides the
customer with access to technical support and software
upgrades. The promises in these contracts are a single
performance obligation, which is satisfied over time
as the customer consumes the benefits of the service.
Revenue in respect of the single performance obligation
is recognised evenly over the contract term.
SaaS subscription and support
Customers typically enter into a SaaS contract for a
period of twelve months and pay a fixed amount in
exchange for the usage of software on a hosted server
over a specified period of time along with access to
maintenance and support. Initial SaaS contracts may
also include some installation or customisation of the
software and training for staff. The promises in this
contract are considered to be a single performance
obligation as the subscription and support are
highly interdependent on one another given that the
customers are required to take the full package of both
the software and support services i.e Instem would
not be able to provide the support services without
the provision of the software nor provide the software
without the support services.
The revenue is recognised over the period of the contract
on a straight-line basis as the customer simultaneously
receives and consumes the benefits of the software and
services provided by the Group.
Professional services and technology enabled
outsourced services
Customers typically enter into a service contract to
provide distinct service work based on clear statements
of work. Service work includes, but is not limited to,
implementation services, training and outsourced
services work relating to SEND and KnowledgeScan.
The promises in this contract are considered to be a
single performance obligation given the services are
interdependent and the revenue is recognised on a
percentage completion basis for fixed price contracts or
as services are provided in respect of time and materials
contracts. The Group has elected to take the practical
expedient to apply this policy to its portfolio distinct
service contracts given the similar characteristics in
these types of contracts.
Bundled contracts
Software licences, professional services - and annual
support are often bundled together in a contract.
4 8
Where the contract assessment identifies that the sale
does not meet the criteria to be a distinct performance
obligation, due to a lack of interdependence between
performance obligations, promises that are not distinct
are combined with other promised goods or services in
the contract, until a performance obligation is satisfied.
Revenue in respect of this bundled performance
obligation is recognised over the period of the
contracted obligation on a straight-line basis.
Amounts recoverable on contracts and deferred income
In most cases, customers are invoiced and payment is
received in advance of revenue being recognised in the
income statement. Amounts recoverable on contracts
and deferred income is the difference between amounts
invoiced to customers and revenue recognised under
the policy described above. If the amount of revenue
recognised exceeds the amounts invoiced the excess
amount is included within amounts recoverable on
contracts.
Contract costs
The incremental costs associated with obtaining a
contract are recognised as an asset if the Group expects
to recover the costs. Costs that are not incremental
to a contract are expensed as incurred. Management
determine which costs are incremental and meet the
criteria for capitalisation.
Costs to fulfil a contract, which are not in the scope
of another standard, are recognised separately as
a contract fulfilment asset to the extent that they
relate directly to a contract which can be specifically
identified; the costs generate or enhance resources that
will be used to satisfy the performance obligation and
the costs are expected to be recovered. Management
applies
judgement to determine which contract
fulfilment costs meet the recognition criteria, and in
particular if the costs generate or enhance resources
used to satisfy the performance obligation.
Costs to fulfil a contract which do not meet the criteria
above are expensed as incurred.
Contract fulfilment asset
Contract fulfilment assets are amortised over the
expected contract period on a systematic basis
representing the pattern in which control of the
associated service is transferred to the customer.
Practical exemptions
The Group has taken advantage of the following
practical exemptions:
• not to account for significant financing components
where the time difference between receiving
consideration and transferring control of goods (or
services) to its customer is one year or less;
•
•
expense the incremental costs of obtaining a
contract when the amortisation period of the asset
otherwise recognised would have been one year or
less; and
to not disclose information relating to performance
obligations for contracts that had an original
expected duration of one year or less or where
the right to consideration from a customer is an
amount that corresponds directly with the value of
the completed performance obligations.
E A R N I N G S B E F O R E I N T E R E S T ,
T A X A T I O N , D E P R E C I A T I O N ,
A M O R T I S A T I O N A N D N O N -
R E C U R R I N G C O S T S ( E B I T D A )
Adjusted EBITDA is profit/(loss) arising from the
Group’s normal trading activities stated before interest,
tax, depreciation, amortisation,
impairment of
goodwill and capitalised development costs and non-
recurring items.
It is shown in this way to provide a clearer measure of
underlying operating performance.
S E G M E N T A L D I S C L O S U R E S
In prior years, the Group reported its business as one
operating segment; Global Life Sciences. The Board
managed the Group by monitoring its revenue streams
and considered the cost base as a whole. During
2019 the business was divided into three operating
segments to better manage and report revenues; Study
Management, Regulatory Solutions and Informatics.
Historically the Group have recorded costs centrally
and have managed costs in this way. During the final
quarter of 2019 certain direct costs were allocated to
the revenue streams whilst the majority of costs were
still recorded and reported centrally. The treatment in
2019 is a new disclosure based on information that was
provided to the Instem Board, the Company’s Chief
Operating Decision Maker, at the end of the year.
Whilst the expectation in future years is to allocate
more centrally held operational costs to the individual
segments, it will take time for the allocations to be
sufficiently accurate for the Board to use segmental cost
information for meaningful decision making. Until that
time, cost allocations will not be provided to the Board
as part of the monthly management information.
The operations of the Group are managed centrally with
group-wide functions including sales and marketing,
development, customer support, human resources and
finance & administration.
4 9
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
F O R E I G N C U R R E N C I E S
Monetary assets and
Transactions in foreign currencies are translated
at the foreign exchange rate ruling at the date of
the transaction.
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.
liabilities of foreign operations,
The assets and
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 consolidated financial statements are presented in
Sterling (GBP), which is also the functional currency of
the Parent Company. 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)
Leadscope Inc.
US Dollars (USD)
The exchange rates used to translate the financial statements into Sterling (GBP) are as follows:
US Dollar
(USD)
Hong Kong
Dollar (HKD)
Chinese
Renminbi
(RMB)
Indian Rupee
(INR)
Japanese
Yen (JPY)
Euro
(EUR)
Average rate for year ended 31 December 2018
1.3354
10.4662
8.8201
91.1933
147.3546
1.1301
Closing rate at 31 December 2018
1.2735
9.9761
8.7611
88.8707
140.3243
1.1138
Average rate for year ended 31 December 2019
1.2739
9.9825
8.7841
89.3413
138.8451
1.1389
Closing rate at 31 December 2019
1.3159
10.2457
9.1621
93.8148
142.9249
1.1735
5 0
N O N R E C U R R I N G I T E M S
Non recurring items are gains or losses which are
infrequent or abnormal and are not part of the ongoing
operations of the business. Non recurring items may
include restructuring costs, legal fees, M&A costs and
other unusual gains or losses.
F I N A N C E I N C O M E
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).
F I N A N C E C O S T S
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 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.
S H A R E - B A S E D P A Y M E N T
T R A N S A C T I O N S
The Group issues equity-settled share-based payments
to certain employees. Equity-settled share-based
payments are measured at fair value at the date of
grant by reference to the fair value of the equity
instruments granted. The fair value determined at
the grant date of equity-settled share-based payments
is expensed on a straight-line basis over the vesting
period, based on the Group’s estimate of the number
of instruments that will eventually vest with a
corresponding adjustment to equity. Fair values are
measured by use of the Binomial, Monte Carlo or
Black Scholes models. The expected life used in the
model has been adjusted, based on management’s best
estimate, for the effect of non-transferability, exercise
restrictions, and behavioural considerations.
Non-vesting and market vesting conditions are taken
into account when estimating the fair value of the
option at grant date. Service and non-market vesting
conditions are taken into account by adjusting the
number of options expected to vest at each reporting
date. Market vesting conditions are linked to the
Group’s share price performance. Non-market vesting
conditions are linked to trading performance and
service over defined time periods.
Cancelled or settled options are accounted for as an
acceleration of vesting. The unrecognised grant date
fair value is recognised in profit or loss in the year
that the options are cancelled or settled. Where the
terms of the options are modified and the modification
increases the fair value or number of equity instruments
granted, measured immediately before and after the
modification, the incremental fair value is spread over
the remaining vesting period.
Options over the Company’s shares granted to
employees of subsidiaries are recognised as a capital
contribution in the subsidiaries and added to the cost
of investment within Instem plc.
T A X A T I O N
Taxation expense includes the amount of current
income tax payable and the charge for the year in
respect of deferred taxation.
The income tax payable is based on an estimation of the
amount due on the taxable profit for the year. Taxable
profit is different from profit before tax as reported
in the statement of comprehensive income because it
excludes items of income or expenditure which are not
taxable or deductible in the year as a result of either
the nature of the item or the fact that it is taxable or
deductible in another year. The Group’s liability for
current tax is calculated by using tax rates that have
been enacted or substantively enacted by the reporting
date.
Income tax credits for research and development
activities are recognised on a cash basis or when their
receipt is reasonably certain.
Deferred tax is accounted for on the basis of temporary
differences arising from the differences between the tax
base and accounting base of assets and liabilities.
Deferred tax is recognised for all taxable temporary
differences, except to the extent where it arises from the
initial recognition of an asset or liability in a transaction
that is not a business combination. Deferred tax assets
are recognised only to the extent that it is probable that
future taxable profits will be available against which
temporary differences can be utilised. Deferred tax is
recognised on income or expenses from subsidiaries
that will be assessed or allow for tax in future periods
except where the Group is able to control the reversal of
the timing difference and it is probable that the timing
difference will not reverse in the foreseeable future.
Deferred tax is charged or credited to the statement of
comprehensive income, except when it relates to items
5 1
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
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.
I N T A N G I B L E A S S E T S
Intangible assets purchased separately from a business
are capitalised at their cost.
Intellectual Property, Customer Relationships,
Brand Names and Patents
The Group makes an assessment of the fair value
of intangible assets arising on acquisitions. These
include Intellectual Property, Customer Relationships,
Brand Names 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,
Brand Names 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
5 2
•
•
•
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
commercially feasible; and
sufficient resources are available to complete the
development and to either sell or use the asset.
Capitalised development costs are those which are
directly attributable to the development activity and
include employee costs, overheads and direct third
party costs.
Where the 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).
Gains or losses arising from derecognition of an
intangible asset are measured as the difference between
the net disposal proceeds and the carrying amount of
the asset and are recognised in profit or loss when the
asset is derecognised.
technically and
is
•
P R O P E R T Y, P L A N T & E Q U I P M E N T
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 - Over term of lease
• IT hardware and software - 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.
L E A S I N G
All leases are accounted for by recognising a right of
use asset and a lease liability except for:
• Leases of low value assets; and
• Leases with a term of 12 months or less.
Lease liabilities are measured at the present value of the
contractual payments due to the lessor over the lease
term, with the discount rate determined by reference to
the rate inherent in the lease unless (as is typically the
case) this is not readily determinable, in which case the
group’s incremental borrowing rate on commencement
of the lease is used. Variable lease payments are only
included in the measurement of the lease liability if they
depend on an index or rate. In such cases, the initial
measurement of the lease liability assumes the variable
element will remain unchanged throughout the lease
term. Other variable lease payments are expensed in
the period to which they relate.
On initial recognition, the carrying value of the lease
liability also includes:
•
amounts expected to be payable under any residual
value guarantee;
the exercise price of any purchase option granted
in favour of the Group if it is reasonably certain to
assess that option;
any penalties payable for terminating the lease, if
the term of the lease has been estimated on the
basis of termination option being exercised.
•
•
Right of use assets are initially measured at the amount
of the lease liability, reduced for any lease incentives
received, and increased for:
•
lease payments made at or before commencement
of the lease;
initial direct costs incurred; and
the amount of any provision recognised where
the Group is contractually required to dismantle,
remove or restore the leased asset (typically
leasehold dilapidations).
•
•
Subsequent to initial measurement lease liabilities
increase as a result of interest charged at a constant rate
on the balance outstanding and are reduced for lease
payments made. Right of use assets are amortised on
a straight-line basis over the remaining term of the
lease or over the remaining economic life of the asset if,
rarely, this is judged to be shorter than the lease term.
When the Group revises its estimate of the term of
any lease (because, for example, it re-assesses the
probability of a lessee extension or termination option
being exercised), it adjusts the carrying amount of
the lease liability to reflect the payments to make over
the revised term, which are discounted at the same
discount rate that applied on lease commencement.
The carrying value of lease liabilities is similarly revised
when the variable element of future lease payments
dependent on a rate or index is revised. In both cases
an equivalent adjustment is made to the carrying value
of the right of use asset, with the revised carrying
amount being amortised over the remaining (revised)
lease term.
When the Group renegotiates the contractual terms of
a lease with the lessor, the accounting depends on the
nature of the modification:
•
if the renegotiation results in one or more additional
assets being leased for an amount commensurate
with the standalone price for the additional rights-
of-use obtained, the modification is accounted for
as a separate lease in accordance with the above
policy
in all other cases where the renegotiated increases
the scope of the lease (whether that is an extension
to the lease term, or one or more additional assets
being leased), the lease liability is remeasured using
the discount rate applicable on the modification
date, with the right of use asset being adjusted by
the same amount
if the renegotiation results in a decrease in the
scope of the lease, both the carrying amount of
the lease liability and right of use asset are reduced
by the same proportion to reflect the partial of
full termination of the lease with any difference
recognised in profit or loss. The lease liability is
then further adjusted to ensure its carrying amount
reflects the amount of the renegotiated payments
over the renegotiated term, with the modified lease
payments discounted at the rate applicable on the
modification date. The right of use asset is adjusted
by the same amount.
•
•
In determining the lease term, the Group assesses
whether it is reasonably certain to exercise, or not
to exercise, options to extend or terminate a lease.
This assessment is made at the start of the lease and
is re-assessed if significant events or changes in
5 3
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
include market
rental agreements
circumstances occur that are within the lessee’s control.
For contracts that both convey a right to the Group
to use an identified asset and require services to be
provided to the Group by the lessor, the Group has
elected to account for the entire contract as a lease, i.e.
it does allocate any amount of the contractual payments
to, and account separately for, any services provided by
the supplier as part of the contract.
The Group applies judgement in determining whether
individual leases can be accounted for as a portfolio.
The judgements include an assessment of whether the
leases share similar characteristics and whether the
financial statements would be materially different if
each lease was accounted for individually.
The Group leases a number of properties in the
In these
jurisdictions from which it operates.
jurisdictions the periodic rent is fixed over the lease
term, with inflationary increases incorporated into the
fixed payments stipulated in the lease agreements.
rate
Where
escalations, the lease liability is re-measured when the
change in cash payments takes affect.
The Group also leases certain vehicles. Leases of
vehicles comprise only fixed payments over the lease
terms.
The Group acts as a lessor in relation to a sublease of
part of one of the properties rented. As the lease term is
for the major part of the economic life of the underlying
right of use asset this has been treated as a finance lease.
The right of use asset has therefore been derecognised
and a net investment in the lease recognised instead.
Interest income is recognised on the lease receivable.
As explained previously, the Company has changed
its accounting policy for leases where the Company
is the lessee. The impact of the change is explained
above. Prior to this change, leases of property, plant
and equipment where the Company, as lessee, had
substantially all the risks and rewards of ownership
were classified as finance leases. Finance leases were
capitalised at the lease’s inception at the fair value of
the leased property or, if lower, the present value of the
minimum lease payments. The corresponding rental
obligations, net of finance charges, were included in
creditors: amounts falling due within 12 months and
the long-term component was included in creditors:
amounts falling due after more than one year. Each lease
payment was allocated between the liability and finance
cost. The finance cost was charged to profit or loss over
the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability
for each period. The property, plant and equipment
acquired under finance leases was depreciated over
the asset’s useful life, or over the shorter of the asset’s
useful life and the lease term if there was no reasonable
certainty that the company would obtain ownership at
the end of the lease term.
Leases in which a significant portion of the risks and
rewards of ownership were not transferred to the
Company as lessee were classified as operating leases.
Payments made under operating leases (net of any
incentives received from the lessor) were charged to
profit or loss on a straight-line basis over the period of
the lease.
I M P A I R M E N T O F A S S E T S
E X C L U D I N G G O O D W I L L
The carrying value of property, plant and equipment
and intangible assets (excluding goodwill) is reviewed
for
in
impairment whenever events or changes
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
(‘CGU’) to which the asset belongs. A CGU is the
smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows
from other assets or groups of assets.
Recoverable amount is the higher of fair value less
costs to sell and value in use. In assessing value in
use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that
reflects current market assessments of the time value of
money and the risks specific to the asset, for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset is estimated to
be less than its carrying amount, the carrying amount
of the asset is reduced to its recoverable amount.
An impairment loss is recognised as an expense
immediately.
5 4
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.
I N V E N T O R Y
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.
P R O V I S I O N F O R L I A B I L I T I E S
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.
F I N A N C I A L I N S T R U M E N T S
Financial assets
The Group classifies its financial assets at amortised
cost. The classification depends on the purpose for
which the financial assets were acquired. Management
determines the classification of its financial assets at
initial recognition.
Financial assets at amortised cost
These assets arise principally from the provision of
goods and services to customers (eg trade receivables),
but also incorporate other types of financial assets where
the objective is to hold these assets in order to collect
contractual cash flows and the contractual cash flows
are solely payments of principal and interest. They are
initially recognised at fair value plus transaction costs
that are directly attributable to their acquisition or
issue, and are subsequently carried at amortised cost,
less provision for impairment.
The Group's financial assets measured at amortised
cost comprise trade and other receivables and cash
and cash equivalents in the consolidated statement of
financial position.
Trade receivables
Trade and other receivables are amounts due from
customers for services performed in the ordinary
course of business. If collection is expected in one
year or less (or in the normal operating cycle of the
business, if longer) they are classified as current assets,
if not, they are presented as non-current assets.
Trade and other receivables are measured at the
transaction price in accordance with IFRS 15.
The Group applies the IFRS 9 simplified approach to
measuring expected credit losses which uses a lifetime
expected loss allowance for all trade receivables and
contract assets. To measure the expected credit losses,
trade receivables and contract assets have been grouped
based on shared credit risk characteristics and the
days past due. The expected loss rates are based on the
payment profiles of sales over a period of 5 years before
31 December 2019 (2018: 31 December 2018) and
the corresponding historical credit losses experienced
within this period. The historical loss rates are adjusted
to reflect current and forward-looking information
on macroeconomic factors affecting the ability of the
customers to settle the receivables. The contract assets
relate to unbilled revenue, which have performance
obligations to be completed. The contract assets have
substantially the same risk characteristics as the trade
receivables for the same types of contracts. The Group
has therefore concluded that the expected loss rates for
trade receivables are a reasonable approximation of the
loss rates for the contract assets.
At each reporting date management assesses whether
any events have occurred which have had a detrimental
effect on the estimated future cash flows of the asset
causing a financial asset to become credit-impaired. If
the credit risk is significant a provision is posted based
on the recoverable amount the Group is expected
to receive per management’s assessment. Specific
provisions of this nature are excluded from the
simplified credit loss calculation using the provision
matrix.
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. Cash and cash equivalents in the
statement of financial position include bank overdrafts.
An offset position is reported as the Group has a legal
right to set off and any settlement would be on a net
basis. For the purposes of the cash flow statement, cash
and cash equivalents include bank overdrafts which are
repayable on demand and are an integral part of Group
cash management.
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
5 5
A C C O U N T I N G P O L I C I E S ( C O N T I N U E D )
liabilities and equity
the statement of comprehensive income in the period
they occur.
Intercompany receivables
Impairment provisions for receivables from related
parties and loans to related parties are recognised
based on a forward looking expected credit loss
model. The methodology used to determine the
amount of the provision is based on whether there has
been a significant increase in credit risk since initial
recognition of the financial asset. For those where
the credit risk has not increased significantly since
initial recognition of the financial asset, twelve month
expected credit losses along with gross interest income
are recognised. For those for which credit risk has
increased significantly, lifetime expected credit losses
along with the gross interest income are recognised.
For those that are determined to be credit impaired,
lifetime expected credit losses along with interest
income on a net basis are recognised.
Financial liabilities and equity
Financial
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
loan notes and bank overdrafts
Interest-bearing
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.
R E T I R E M E N T B E N E F I T S
Defined contribution schemes
A defined contribution scheme is a pension plan
under which the Group pays a fixed contribution
to a scheme with an external provider. The amount
charged to the statement of comprehensive income
in respect of pension costs and other post-retirement
benefits is the total of contributions payable in the year.
Differences between contributions payable in the year
and contributions actually paid are shown as either
other payables or other receivables in the statement of
financial position. The Group has no further payment
obligations once the contributions have been paid.
Defined benefit scheme
A defined benefit scheme is a pension plan under
which the Group pays contributions in order to fund
a defined amount of pension that the employees
under the scheme will receive on retirement. The
cost of providing the benefits is determined using the
projected unit credit method with actuarial valuations
being carried out regularly.
An asset or liability is recognised equal to the present
value of the defined benefit obligation, adjusted for
unrecognised past service costs and reduced by the fair
value of plan assets.
Actuarial gains and losses are recognised in the
statement of other comprehensive income in the
year in which they occur, whilst expected returns on
plan assets, servicing costs and financing costs are
recognised in the statement of comprehensive income.
The rate used to discount the benefit obligations is
based on market yields for high quality corporate
bonds with terms and currencies consistent with those
of the benefit obligations.
S I G N I F I C A N T J U D G E M E N T S
A N D E S T I M A T E S
In the process of applying the Group’s accounting
policies, which are described above, management have
made judgements and estimations about the future
that have the most significant effect on the amounts
recognised in the financial statements. The estimates
and underlying assumptions are reviewed on an on-
going basis. Revisions to accounting estimates are
recognised in the period in which the estimate is
revised if the revision affects only that period or in the
5 6
technology
is applied
services
services.
period of revision and future periods if the revision
affects both current and future periods.
Significant judgements
The following judgments have the most significant
effect on the financial statements.
Revenue Recognition
The Group generates revenue from the provision of
software licences, annual support, SaaS subscriptions,
enabled
and
professional
outsourced
in
Judgement
determining how many performance obligations there
are within each contract and the period in which these
obligations will be fulfilled and recognised as revenue,
based on the Group’s accounting policies.
Estimation uncertainty
Information about estimations and assumptions that
may have the most significant affect on recognition and
measurement of assets, liabilities, income and expenses
is provided below. Actual results may be substantially
different.
Provision for liabilities
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past
event, it is probable that the Group will be required to
settle the probable outflow of resources, and a reliable
estimate can be made of the amount of the obligation.
As at 31 December 2019, the Group has a provision of
£0.25m (2018: £0.25m) in respect of historical contract
disputes as the directors have considered that the above
provision conditions have been met. The provision
represents the best estimate of the risks and considers
all information and legal input received by the Group.
Impairment of goodwill
The carrying value of goodwill must be assessed for
impairment annually. This requires a value in use
estimate which is dependant on estimation of future
cashflows and the use of an appropriate discount rate
to discount those cash flows to their present value.
The carrying value of goodwill as at 31 December
2019 is £9,864,000 (2018: £10,590,000). There was an
impairment charge of £2,482,000 during the year. Refer
to note 12 for further detail.
Impairment of other intangible assets
Other intangibles assets consist of assets acquired
(customer relationships, intellectual property and brand
names) as part of the net assets of certain subsidiaries
and software, being mainly capitalised development
costs. Impairment testing requires a value in use
estimate which is dependant on an estimation of future
cashflows and the use of an appropriate discount rate
to discount those cash flows to their present value. The
carrying amounts of acquired intangibles and software
at the reporting date was £4,241,000 and £3,692,000
respectively (2018: £2,934,000 and £3,887,000). There
was an impairment charge of £693,000 during the year.
Refer to note 12 for further detail.
Leases - Incremental borrowing rate
Management have concluded that that the interest rate
implicit in the leases cannot not be readily determined
therefore the leases held have been discounted by the
incremental borrowing rate (IBR), being the rate of
interest that the Group would have to pay to borrow
over a similar term, and with a similar security, the
funds necessary to obtain assets of a similar value to the
right of use assets in a similar economic environment.
To determine the IBR, management approached a
number of banks and has used the lending rate and
margin offered of 4.00%, being a lending rate of 0.75%
(base rate at 31 December 2019) and margin of 3.25%.
For longer leases of over 5 years management considers
a discount rate of 5% to be a more accurate reflection.
Pension scheme
As stated above the Group operates a defined benefit
pension scheme. At the end of each six monthly
reporting period the Group seeks external expert
actuarial advice on the assumptions to apply to the
calculation of the scheme’s liabilities. The Group
then engages a separate, independent firm of pension
advisors to calculate the scheme surplus or deficit at the
reporting date for accounting purposes. The scheme
deficit at 31 December 2019 is £1,804,000 (2018:
£2,249,000).
Contingent consideration
Where acquisition consideration includes consideration
contingent on performance outcomes being met, the
consideration is valued at the acquisition date based
on performance forecasts available at the time. Those
forecasts are reviewed at the reporting date and the
consideration revised where materially different.
5 7
N O T E S T O T H E F I N A N C I A L S T A T E M E N T S
1. R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S
a. Segmental Reporting
The Group has disaggregated revenue into various categories in the following tables which are intended to depict how
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
In prior years, the Group reported its business as one operating segment; Global Life Sciences. The Board managed
the Group by monitoring its revenue streams and considered the cost base as a whole. Historically the Group’s finance
systems have recorded costs centrally and have managed costs in this way. Without systems capable of allocating
costs accurately, the Board concluded that there was only one operating segment in which revenues and costs were
reported. Over recent years the Group has expanded both organically and through acquisition, increasing the number
of products and services. During 2019 the business was divided into three operating segments to better manage and
report revenues; Study Management, Regulatory Solutions and Informatics.
There has been an ongoing project to enhance the quality of management information (MI) following the
implementation of a new finance system. During the final quarter of 2019 certain direct costs were allocated to the
revenue streams whilst the majority of costs were still recorded and reported centrally. The treatment in 2019 is a new
disclosure based on information that was provided to the Instem Board, the Company’s Chief Operating Decision
Maker, at the end of the year.
Whilst the expectation in future years is to allocate more centrally held operational costs to the individual segments,
it will take time for the allocations to be sufficiently accurate for the Board to use segmental cost information for
meaningful decision making.
The operations of the Group are managed centrally with group-wide functions including sales and marketing,
development, customer support, human resources and finance & administration.
The analysis provided below reflects costs directly attributable to the respective segments in 2019, which are primarily
third party costs of sale and costs of allocated employees. The remaining indirect operational costs are accounted for
centrally and are not allocated to specific segments.
There are no comparative cost numbers shown for 2018 as data was not recorded in this way and so numbers were
not available. Set out below is a split of revenue in 2018 between the three business segments identified in 2019. This
information is provided to aid comparability not as a restatement of prior year disclosures.
5 8
1. R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S ( C O N T I N U E D )
SEGMENTAL REPORTING
2019
Study
Management
£000
Regulatory
Solutions
£000
Informatics
£000
15,188
(4,370)
10,818
9,037
(2,111)
6,926
1,492
(660)
832
Total revenue
Direct attributable costs
Contribution to indirect overheads
Central unallocated indirect costs
Adjusted EBITDA
Depreciation
Amortisation of intangibles arising on acquisition
Amortisation of internally generated intangibles
Amortisation of right of use assets
Impairment of goodwill and capitalised development
LOSS BEFORE NON-RECURRING COSTS
Non-recurring costs
LOSS AFTER NON-RECURRING COSTS
Finance income
Finance costs
LOSS BEFORE TAXATION
SEGMENTAL REPORTING
2018
Study
Management
£000
Regulatory
Solutions
£000
Informatics
£000
Total revenue
14,451
7,513
741
Central unallocated indirect costs
Adjusted EBITDA
Depreciation
Amortisation of intangibles arising on acquisition
Amortisation of internally generated intangibles
PROFIT BEFORE NON-RECURRING COSTS
Non-recurring costs
PROFIT AFTER NON-RECURRING COSTS
Finance income
Finance costs
PROFIT BEFORE TAXATION
Total
£000
25,717
(7,141)
18,576
(13,712)
4,864
(155)
(523)
(755)
(607)
(3,175)
(351)
(302)
(653)
7
(255)
(901)
Total
£000
22,705
(18,653)
4,052
(144)
(788)
(738)
2,382
(539)
1,843
33
(199)
1,677
5 9
1. R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S ( C O N T I N U E D )
REVENUE BY PRODUCT TYPE
Licence fees
Annual support fees
SaaS subscription and support fees
Professional services
Technology enabled outsourced services
REVENUE BY GEOGRAPHICAL LOCATION
UK
Rest of Europe
USA and Canada
Rest of World
NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION BY
GEOGRAPHICAL LOCATION
UK
Rest of Europe
USA and Canada
Rest of World
2019
£000
3,501
8,418
6,444
1,773
5,581
25,717
2019
£000
3,414
5,051
12,701
4,551
25,717
2019
£000
17,779
1,107
432
881
20,199
2018
£000
3,491
8,160
5,509
2,204
3,341
22,705
2018
£000
3,504
4,534
11,507
3,160
22,705
2018
£000
16,896
624
133
58
17,711
There were no customers which represented more than 10% of the Group revenue in 2019 (2018: none).
6 0
1. R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S ( C O N T I N U E D )
b. Contract Balances
Amounts
recoverable on
contracts
£000
At 1 January
2,807
Transfer in the period from amounts recoverable on
contracts to trade receivables
(2,807)
Amounts included in deferred income that was
recognised as revenue during the period
Deferred income on acquisition of Leadscope Inc.
Cash received in advance of performance and not
recognised as revenue during the period
Excess of revenue recognised over cash being
recognised during the period
At 31 December
-
-
1,365
1,365
2019
2018
Deferred
income
(8,625)
-
8,625
(818)
(8,124)
-
(8,942)
Amounts
recoverable on
contracts
2,389
(2,389)
-
-
2,807
2,807
Deferred
income
(10,967)
-
10,967
-
(8,625)
-
(8,625)
Amounts recoverable on contracts and deferred income are included within “trade and other receivables” and
“deferred income” respectively on the face of the statement of financial position.
Amounts recoverable on contracts predominately relate to fulfilled obligations on service contracts where billing is
in arrears. At the point where completed work is invoiced, the contract asset is derecognised and a corresponding
receivable recognised.
Deferred income relates to consideration received from customers in advance of work being completed plus
maintenance and support which is invoiced in advance.
c. Remaining performance obligations
The vast majority of the Group’s contracts are for the delivery of software and services within the next 12 months for
which the practical expedient in paragraph 121(a) of IFRS 15 applies. However, certain bundled contracts have been
entered into for which both the original contract was greater than 12 months and the Group’s right to consideration
does not correspond directly with the performance.
The amount of revenue that will be recognised in future periods on these contracts is as follows:
2020
£000
283
Revenue
2021
£000
48
2022
£000
9
d. Contract Costs
It is expected that commissions paid are recoverable. These have therefore been capitalised as an asset and are
amortised over the term of the contract.
The carrying value of costs to obtain contracts with customers which have been capitalised is an amount of £nil
(2018: £0.01m). Amortisation of £0.1m (2018: £0.02m) was recognised during the year.
The entity has applied the practical expedient available in paragraph 94 of IFRS 15 to recognise the incremental
costs of obtaining a contract as an expense when incurred where the amortisation period of the asset that the entity
otherwise would have recognised is one year or less.
6 1
2. P R O F I T B E F O R E N O N - R E C U R R I N G C O S T S
Profit from operations includes the following significant items:
Depreciation and amounts written off property, plant and equipment - owned assets
Amortisation of intangible assets
Amortisation of right to use assets
Research and development costs
Impairment of goodwill
Impairment of capitalised development
Operating lease rentals:
Plant and machinery
Land and buildings
Short life lease expenses
2019
£000
155
1,278
607
1,711
2,482
693
-
-
21
Amounts payable to Grant Thornton UK LLP and their associates in
respect of both audit and non-audit services:
Audit
108
Non-audit services:
Taxation services - Compliance
Taxation services - Advisory
Corporate finance services
Amounts payable to RSM UK Audit LLP and their associates
in respect of both audit and non-audit services
Audit
Non-audit services:
Assurance services
Taxation services - Compliance
Taxation services - Advisory
27
69
30
-
-
-
-
234
2018
£000
114
1,526
-
1,623
-
-
37
527
-
-
-
-
-
93
22
22
26
163
6 2
2. P R O F I T B E F O R E N O N - R E C U R R I N G C O S T S ( C O N T I N U E D )
The following tables analyse employee benefits operating expense and other expenses:
2019
£000
Employee benefits expense
Staff costs (see note 6)
13,534
Share based payments
75
Other expenses
Operating lease rentals
Software maintenance charges
Licence costs
Third party costs
Other expenses
3. N O N - R E C U R R I N G C O S T S
Guaranteed Minimum Pension (GMP) equalisation provision
Professional fees
Legal costs relating to historical contract disputes
Acquisition costs
13,609
28
731
1,457
2,812
2,216
7,244
2019
£000
-
-
106
196
302
2018
£000
12,220
216
12,436
564
561
1,109
2,299
1,684
6,217
2018
£000
364
126
49
-
539
Acquisition costs incurred in the period relate to the purchase of Leadscope Inc. on 15 November 2019. The costs
incurred were directly linked to the acquisition and consisted of legal, accounting and commercial advice.
4 . F I N A N C E I N C O M E
Foreign exchange gains
Other interest
2019
£000
-
7
7
2018
£000
25
8
33
6 3
5 . F I N A N C E C O S T S
Bank loans and overdrafts
Unwinding discount on deferred consideration
Net interest charge on pension scheme
Lease interest cost
Right of use asset interest cost
Foreign exchange losses
2019
£000
34
-
60
2
118
41
255
2018
£000
11
12
172
4
-
-
199
6 . E M P L O Y E E S
Group
2019
Number
2018
Number
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
39
229
268
11,444
1,148
942
13,534
Average monthly number (including non-executive directors)
Company
2019
Number
By role:
Non-executive directors
Employment costs:
Wages and salaries
Social security costs
3
120
13
133
39
199
238
10,416
1,031
773
12,220
2018
Number
3
120
10
130
6 4
7 . L E A S E S
Lease liabilities are presented in the statement of financial position as follows:
Current
Non current
2019
£000
565
2,004
2,569
2018
£000
-
-
-
Nature of leasing activities in the capacity of lessee
The Group leases a number of offices in the jurisdictions from which it operates. In these jurisdictions the periodic
rent is fixed over the lease term, with inflationary increases incorporated into the fixed payments stipulated in the
lease agreements. Where rental agreements include market rate escalations, the lease liability is re-measured when
the change in cash payments takes effect. The Group also leases certain vehicles. Leases of vehicles comprise only
fixed payments over the lease terms. With the exception of short term leases, leases of low value underlying assets,
leases held by the newly acquired Leadscope Inc and a lease held for a telephone system, with less than twelve
months remaining on the lease as at 31 December 2019, each lease is reflected on the balance sheet as a right of use
asset and a lease liability.
Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset
to another party, the right of use asset can only be used by the Group. Leases are either non cancellable or may only
be cancelled by incurring a termination fee. Some leases contain an option to extend the lease for a further term.
For office leases the Group must keep those properties in a good state of repair and return the properties in their
original condition at the end of the lease.
The table below describes the nature of the Groups leasing activities by type of right of use asset recognised on the
balance sheet:
Right of use assets
No of right
of use assets
leased
Range of
remaining
term
No of leases
with extension
options
No of leases
with options
to purchase
No of leases
with payments
linked to an
index
No of leases
with
termination
options
Office buildings
Vehicles
9
2
3.5 years
0.4 years
9
0
0
0
1
0
0
0
6 5
7 . L E A S E S ( C O N T I N U E D )
The aggregate lease liability recognised in the statement of financial position at 1 January 2019 and the Group’s
operating lease commitment at 31 December 2018 can be reconciled as follows:
Operating lease commitment as at 31 December 2018
Effect of foreign exchange on brought forward balance
Effect of discounting those lease commitments
Recognition of variable lease payments
Effect of electing to account for short-term and low value leases off statement of financial position
Effect of lease extended during 2019
2019
£000
3,363
(104)
(358)
83
(6)
24
At 1 January 2019
3,002
Right of use assets
As at 1 January 2019
Derecognition of sublease
Amortisation
Exchange adjustment
As at 31 December 2019
Lease liabilities
As at 1 January 2019
Interest expense
Lease payments
Exchange adjustment
As at 31 December 2019
Land & buildings
£000
Motor vehicles
£000
2,978
(249)
(590)
19
2,158
3,020
117
(676)
102
2,563
24
-
(17)
-
7
22
1
(17)
-
6
Total
£000
3,002
(249)
(607)
19
2,165
3,042
118
(693)
102
2,569
Lease liability maturity analysis:
As at 31 December 2019
1 year or less
£000
2 to 5 years
£000
After five years
£000
Lease liabilities
565
1,950
54
Total
£000
2,569
6 6
7 . L E A S E S ( C O N T I N U E D )
The following amounts in respect of leases, where the company is a lessee, have been recognised in consolidated
statement of comprehensive income:
Expenses relating to short-term leases
Low value lease expense
Interest expense
Amortisation of right of use assets
2019
£000
21
7
118
607
The total cash outflow for leases in 2019 was £0.7m.
Finance lease receivable
Nature of leasing activities in the capacity of lessor
The Group also acts as a lessor in relation to a sublease of part of one of the properties rented. As the lease term is
for the major part of the economic life of the underlying right of use asset this has been treated as a finance lease.
The right of use asset has therefore been derecognised and a net investment in the lease recognised instead. Interest
income is recognised on the lease receivable.
Movement in net investment in leases in relation to sub leases during the year ended 31 December 2019 is as
follows:
As at 1 January 2019
Addition
Interest earned
Less: Rental Income received
At 31 December 2019
Minimum undiscounted lease payments receivable are as follows:
Within 1 year
Between 1 and 2 years
Between 2 and 3 years
Between 3 and 4 years
Later than 5 years
2019
£000
221
1
(8)
214
2019
£000
47
48
50
51
40
236
6 7
7 . L E A S E S ( C O N T I N U E D )
Reconciliation of minimum undiscounted lease payments to net investment in the lease:
Total minimum undiscounted lease payments receivable as at 31 December 2019
Unearned finance income
Net investment in the lease as at 31 December 2019
Finance lease receivable maturity analysis:
As at 31 December 2019
1 year or less
£000
2 to 5 years
£000
After five years
£000
Finance lease receivable
39
175
-
2019
£000
236
(22)
214
Total
£000
214
6 8
8 . S H A R E B A S E D P A Y M E N T
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 vest and become exercisable after three years where
certain performance criteria have been met. Share options issued to directors and senior employees carry profitability
(EBITDA) or market based performance conditions.
2019
2018
Number
Weighted average
exercise price (£)
Outstanding at the beginning of the year
1,465,548
Granted
7,740
Lapsed
(16,804)
Exercised
(473,181)
Outstanding at end of the year
983,303
Exercisable at end of year
678,659
0.85
0.10
0.10
1.37
0.60
0.83
Number
1,098,230
408,446
(9,857)
(31,271)
1,465,548
1,014,341
Weighted average
exercise price (£)
1.14
0.10
0.10
1.60
0.85
1.18
The options outstanding at 31 December 2019 and 31 December 2018 had exercise prices of £0.10, £0.90, £1.75, £1.76
and £2.22 and a weighted average remaining contractual life of 5 years 3 months (2018: 5 years 3 months).
A charge of £0.075m (2018: £0.2m) arose in respect of share based payments.
New options for 7,740 shares were granted in the year which are valued using the Monte-Carlo option-pricing model.
Options over 7,740 shares (2018: 8,446) 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 £0.02m (2018: £0.2m).
During the year, the average share price in respect of share options exercised was £3.17 (2018: £2.09)
6 9
9 . D I R E C T O R S ' E M O L U M E N T S
Amounts payable by Instem plc:
Emoluments
Amounts payable by subsidiary companies:
Emoluments
Defined contribution pension contributions
Total emoluments
2019
£000
120
359
43
522
2018
£000
120
335
41
496
2019
Number
2018
Number
Number of directors to whom retirement benefits
are accruing under:
Defined contribution schemes
2
2
The remuneration of the highest paid director during the year ended 31 December 2019 was £261,000 (2018:
£243,000). Directors’ remuneration analysed by director is shown on page 29.
1 0 . T A X A T I O N
Income taxes recognised in profit or loss:
Current tax:
UK corporation tax on profit of the year
UK corporation tax in respect of previous years
Adjustments in respect of R&D tax credit
Foreign tax
Foreign tax in respect of previous years
Total current tax credit/(charge)
Deferred tax:
Current year charge
Adjustment in respect of previous years
Retirement benefit obligation
Total deferred tax charge
Total income tax charge recognised in the current year
2019
£000
-
28
464
(404)
67
155
(96)
(11)
(70)
(177)
(22)
2018
£000
-
(85)
477
(403)
(12)
(23)
(67)
(83)
(34)
(184)
(207)
7 0
1 0 . T A X A T I O N ( C O N T I N U E D )
The income tax (expense)/credit can be reconciled to the accounting profit as follows:
(Loss)/Profit before tax
Profit before tax multiplied by standard rate of corporation tax in the UK 19.0% (2018: 19.0%)
Effects of:
Expenses not allowable for tax purposes
Enhanced R&D tax relief
Losses surrendered for R&D tax credit
R&D tax credit accrual
Impairment of goodwill and capitalised development
Double tax relief
Tax losses utilised
2019
£000
(901)
171
34
454
(599)
572
(604)
110
18
Difference in overseas tax rates
(128)
Adjustments in respect of prior years
Other differences
Total income tax charge recognised in consolidated statement of comprehensive income
(68)
18
(22)
2018
£000
1,677
(319)
172
438
(660)
477
-
-
31
(187)
(180)
21
(207)
7 1
1 1 . A C Q U I S I T I O N O F L E A D S C O P E I N C
Company
Principal activity
Date of acquisition
Proportion of voting
equity interests
acquired
%
Consideration
£000
Leadscope Inc
Provider of Regulatory Information Management
software and services to Life Science sector
15 November 2019
100
3,516
Leadscope Inc was acquired to continue the expansion and development of the Group’s capabilities in the Global
Life Sciences sector.
Consideration
Initial cash consideration
Initial share consideration
Deferred consideration (14 November 2020) – To be settled in cash
Deferred consideration (14 November 2021) – To be settled in cash
Contingent consideration (1 March 2022) – To be settled in cash
Working capital adjustment – (Q1 2020) – To be settled in cash
$000
2,250
1,100
375
375
500
95
Total consideration
4,695
Discounting of estimated future cashflows
Fair value of consideration
£000
1,746
856
291
291
388
73
3,645
(129)
3,516
The initial share consideration was satisfied by the issue of 231,966 new Instem plc ordinary shares at a value of
£856,000. The premium arising on the share issue of £834,000 has been credited to the merger relief reserve.
The deferred consideration is not based on any performance related conditions and is payable in two equal
instalments in November 2020 and 2021. The contingent consideration is based on certain performance related
conditions in respect of the financial year ending 31 December 2021. The contingent consideration in the table
above is based on the forecast estimate that the performance related conditions will be fully met and the full
consideration will be payable. The contingent consideration was re-measured at the reporting date.
Acquisition related costs amounting to £0.2m have been excluded from the consideration transferred and have
been recognised as an expense in the current year, within non-recurring items in the Consolidated Statement of
Comprehensive Income.
7 2
1 1 . A C Q U I S I T I O N O F L E A D S C O P E I N C ( C O N T I N U E D )
Fair value of assets acquired and liabilities recognised at the date of acquisition
Fair Value
£000
Non-Current Assets
Intellectual property
1,185
Customer relationships
Brand names
Property, plant and equipment
Current Assets
Trade and other receivables
Cash and cash equivalents
Current Liabilities
Trade and other payables
Deferred income
Non-Current Liabilities
Deferred tax on acquisition
Fair value of identifiable net assets acquired
Goodwill arising on acquisition
Consideration transferred
Less: fair value of identifiable net assets
Goodwill arising on acquisition
264
380
5
-
408
451
(116)
(818)
(311)
1,448
£000
3,516
(1,448)
2,068
7 3
1 1 . A C Q U I S I T I O N O F L E A D S C O P E I N C ( C O N T I N U E D )
Goodwill
Goodwill of £2,068,000 is primarily related to expected profitability, the significant skill and expertise of Leadscope’s
staff, and cross-selling opportunities achieved by combining the acquired customer bases.
Identifiable net assets
A provisional fair value exercise to determine the fair value of assets and liabilities acquired has been carried out.
Fair values are provisional as they are within the twelve month hindsight period to adjust fair values. No fair value
adjustments have been made to the assets and liabilities acquired.
The fair value of intangible assets are:
•
Intellectual property of £1,185,000, calculated using the income method (relief from royalty approach). Software
and databases form Leadscope’s chemoinformatics platform. A suite of tools is available, including informatics
software, databases and prediction models, which generate Leadscope’s revenue and are vital assets to the
company.
• Customer relationships of £264,000, calculated using the income method (excess earnings). The company has
a stable and established customer base, which provides a recurring revenue stream, and includes regulatory
agencies in the US and other regions.
• Brand names of £380,000, calculated using the income method (relief from royalty approach). The company has
a strong brand, reflecting its reputation for providing a high quality product and provides scientific leadership in
computational toxicology.
Impact of acquisition on the results of the Group
Profit for the year includes a profit of £0.1m attributable to the additional business generated by Leadscope Inc from
the date of acquisition. Revenue for the year includes £0.3m in respect of Leadscope Inc.
If this business combination had been effected at 1 January 2019, the revenue of Leadscope from continuing
operations would have been £1.6m, and the profit for the year from continuing operations would have been £0.5m.
The directors consider these values to represent an approximate measure of the performance of Leadscope on an
annualised basis and to provide a reference point for comparison in future years.
7 4
12. I N T A N G I B L E A S S E T S
Goodwill
£000
Software
£000
Intellectual
property
£000
Customer
relationships
£000
Brand
Names
£000
Patents
£000
Total
£000
Group
Cost
At 1 January 2018
10,590
Additions
Disposals
Exchange adjustment
-
-
-
At 31 December 2018
10,590
Additions
Disposals
-
-
Acquisition
2,068
Exchange adjustment
-
5,432
1,490
(96)
14
6,840
1,344
(60)
18
(35)
4,527
2,874
-
-
-
-
-
-
4,527
2,874
-
-
1,185
-
-
-
264
-
At 31 December 2019
12,658
8,107
5,712
3,138
Amounts written off
At 1 January 2018
Disposals
Amortisation expense
Exchange adjustment
At 31 December 2018
Amortisation expense
-
-
-
-
-
-
Impairment charge
2,482
Acquisition
Exchange adjustment
-
-
2,304
2,548
1,131
(96)
738
7
2,953
755
693
18
(4)
-
492
-
3,040
332
-
-
-
-
296
-
1,427
191
-
-
-
At 31 December 2019
2,482
4,415
3,372
1,618
Net book value
At 31 December 2018
10,590
3,887
At 31 December 2019
10,176
3,692
1,487
2,340
1,447
1,520
-
-
-
-
-
-
-
380
-
380
-
-
-
-
-
-
-
-
-
-
-
380
21
-
-
-
21
-
-
-
-
21
21
-
-
-
21
-
-
-
-
23,444
1,490
(96)
14
24,852
1,344
(60)
3,915
(35)
30,016
6,004
(96)
1,526
7
7,441
1,278
3,175
18
(4)
21
11,908
-
-
17,411
18,108
The gross carrying amount and accumulated amortisation within Software includes internally generated and externally
acquired elements. The cost of internally generated software amounts to £7.4m (2018: 6.1m) with accumulated
amortisation of £3.0m (2018: £2.3m). Software additions for the year include £1.3m relating to internal development
(2018: £1.5m).
7 5
12. I N T A N G I B L E A S S E T S ( C O N T I N U E D )
Gross carrying amount of goodwill
Goodwill amounting to £5.9m (2018: £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
(2018: £0.5m), relates to a CGU, being the Instem Scientific Limited business acquired on 3 March 2011. Goodwill
amounting to £2.5m (2018: £2.5m), relates to a CGU, being the Instem Clinical Holdings Limited business acquired
on 10 May 2013. Goodwill amounting to £0.7m (2018: £0.7m) relates to a CGU, being the Perceptive Instruments
Limited business acquired on 21 November 2013. Goodwill amounting to £0.6m (2018: £0.6m) relates to a CGU,
being the Samarind Limited business acquired on 27 May 2016. Goodwill amounting to £0.5m (2018: £0.5m) relates
to a CGU, being the Notocord SA business acquired on 2 September 2016. Goodwill amounting to £2.1m (2018: £nil)
relates to a CGU, being the Leadscope Inc business acquired on 15 November 2019.
Impairment testing
The Group tests annually for impairment, or more frequently if there are indications that goodwill might be impaired.
Key assumptions
The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the
value in use calculations are those regarding discount rates, growth rates, margins and cashflows.
Discount rates
Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of
money and any risks specific to the CGUs. The rates used to discount the future cashflows are based on the Group’s
pre-tax weighted average cost of capital (WACC) of 10.0% (2018: 10.5%). Management’s view is that there are no
specific risks to be applied to particular CGUs.
Growth rates and terminal values
The revenue growth rates and margins are based on current Board-approved budgets and forecasts covering a period
of five years. The Group produces a budget for 2020 and then projects to 2024 based on growth rates of 2.5% (2018:
2.5%), which management estimates as reasonable considering business growth rates, payroll and other cost base
increases. A terminal value is 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.
Sensitivity analysis
Management has carried out sensitivity analyses on the key assumptions used in recoverable amount calculations.
Management does not believe that there are any reasonably possible changes in the assumptions used in the value
in use calculations which would result in the carrying amount of any cash generating unit exceeding its recoverable
amount.
The carrying amount includes goodwill, other intangible assets and tangible assets. The headroom of recoverable
amount over carrying amount and sensitivities are detailed below:
The recoverable amount of the Instem LSS CGU exceeds the carrying amount of this CGU by 757%, for the Instem
Scientific CGU by 660%, Perceptive Instruments CGU by 288%, Samarind CGU by 305%, Notocord CGU by
114% and Leadscope CGU by 141%. 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 64%, or a reduction in
certain revenues of in excess of 22%, would result in the recoverable amount of the Instem LSS CGU being equal to
its carrying amount. An additional increase of 53% in the Instem Scientific discount rate, or a reduction in revenues
of 21% would result in the recoverable amount of the CGU being equal to its carrying amount. An additional increase
of 16% in the Perceptive Instruments discount rate, or a reduction in revenues of 14% would result in the recoverable
amount of the CGU being equal to its carrying amount. An additional increase of 17% in the Samarind discount rate,
or a reduction in revenues by 14% would result in the recoverable amount of the CGU being equal to its carrying
value. An additional increase of 2% in the Notocord discount rate, or a reduction in revenues by 2% would result
in the recoverable amount of the CGU being equal to its carrying value. Finally, an additional increase of 4% in the
Leadscope discount rate, or a reduction in revenues by 8% would result in the recoverable amount of the CGU being
7 6
12. I N T A N G I B L E A S S E T S ( C O N T I N U E D )
equal to its carrying value. The recoverable amount of the Instem Clinical CGU did not exceed the carrying amount
of this CGU and an impairment charge has been recognised.
Review of carrying value of goodwill
The recoverable amount for each of the CGU has been measured using a value-in-use calculation and no impairment
was required with the exception of the Alphadas early phase clinical data collection business. This market sector has
been going through considerable structural change and little new data collection software business has been placed
in this sector over the last 18 months. We envisage further slippage in the pipeline of new opportunities, with no
certainty regarding the timing of new business awards. A goodwill impairment of £2.5m has been recognised.
The value in use calculations are reliant on the accuracy of management’s forecast and the assumptions that underly
them as well as the discount rate and growth rates applied.
Net realisable value calculations, based on sales and profitability, have been used by the Group to conclude a goodwill
impairment of £2.5m should be recognised in 2019.
Other intangible assets
An impairment loss of £0.7m has been recognised for internally developed software in the Alphadas early phase
clinical data collection business. The recoverable amount of the asset has been determined using net realisable value
calculations, based on sales and profitability.
7 7
13. I N V E S T M E N T S I N S U B S I D I A R I E S
Cost
At 1 January 2019
Additions
At 31 December 2019
Provisions
At 1 January 2019
Additions
At 31 December 2019
Carrying value
At 31 December 2018
At 31 December 2019
£000
28,927
75
29,002
£000
-
2,810
2,810
£000
28,927
26,192
The Company tests annually for impairment against investments held.
The Company prepares margin and cashflow forecasts based on current Board-approved budgets and forecasts
covering a period of five years, applying growth rates of 2.5% (2018: 2.5%), which management estimates as reasonable
considering business growth rates, payroll and other cost base increases. A terminal value is 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. The rate used to discount the future cashflows is based on the Group’s pre-tax
weighted average cost of capital (WACC) of 10.0% (2018: 10.5%). Management’s view is that there are no specific risks
to be applied to a particular entity being reviewed.
An impairment provision of £2.8m has been made during the year against the carrying value of the investment in the
Alphadas early phase clinical data collection business.
At the end of the year the Company has six wholly-owned subsidiaries and twelve wholly-owned sub-subsidiaries,
details of which are as follows:
Company
Registered Address
Activity
Ownership
Instem Life Science Systems Limited
(company number 04339129)
England and Wales
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
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,
sales, sales support and
administrative support
100% by Instem Life Science
Systems Limited
Sales, sales support and
administrative support
100% by Instem LSS Limited
Holding Company
100% by Instem LSS Limited
Instem Information Systems (Shanghai) Limited
(company number 310115400257075)
Shanghai, PRC
Room 205, Building 16
88 Da’erwen Road
Zhanjiang, High Tech Park
Pudong District 201203
Sales, sales support and
service
100% by Instem LSS (Asia)
Limited
7 8
Company
Registered Address
Activity
Ownership
Instem Scientific Limited
(company number 03861669)
England and Wales
Instem Scientific Solutions Limited
(company number 03598020)
England and Wales
Instem Scientific Inc.
USA
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Diamond Way
Stone Business Park
Stone, Staffordshire
ST15 0SD
Leading provider of software
solutions for extracting
intelligence from R&D
related healthcare data
100% by Instem plc
Dormant
100% by Instem Scientific
Limited
Suite 1550
161 Washington Street
8 Tower Bridge
Conshohocken PA 19428
Leading provider of software
solutions for extracting
intelligence from R&D
related healthcare data
100% by Instem Scientific
Limited
Instem India Pvt Limited
(company number U73100MH2012FTC231951)
India
Adisa Icon
Mumbai Bangalore Highway
Bavdhan Budruk
Pune 411021
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
Notocord Systems S.A.
(company number 350927349)
France
Notocord Inc.
USA
Leadscope Inc.
USA
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
Stone Business Park
Stone, Staffordshire
ST15 0SD
Parc des Grillons
60, route de Sartrouville
78230 Le Pecq
Paris
PO Box 10188
Newark
New Jersey
07101-3188
1393 Dublin Road
Columbus
Ohio 43215
99.9% by Instem LSS Limited
0.1% by Instem LSS (NA)
Limited
100% by Instem plc
100% by Instem Clinical
Holdings Limited
100% by Instem Clinical
Holdings Limited
100% by Instem plc
Software development
Holding of intellectual
property
rights and investment in
group
companies
Provision of electronic
data capture and clinical
management solutions to the
pharmaceutical industry
Provision of electronic
data capture and clinical
management solutions to the
pharmaceutical industry
Development, manufacture
and supply of software and
hardware products for in
vitro study data collection
and study management
in the genetic toxicology,
microbiology and
immunology markets
Sales, sales support and
service
100% by Instem LSS Limited
Provider of regulatory
information management
software
100% by Instem plc
Software development, sales
support and administrative
support
100% by Instem plc
Sales, sales support and
administrative support
100% by Notocord Systems
S.A.
Leading provider of in-silico
safety assessment software
100% Instem Scientific Inc
7 9
14. P R O P E R T Y, P L A N T A N D E Q U I P M E N T
Group
Cost
At 1 January 2018
Additions
Disposals
Adjustment
Exchange adjustment
At 31 December 2018
Additions
Disposals
Acquisition
Exchange adjustment
At 31 December 2019
Depreciation
At 1 January 2018
Depreciation expense
Disposals
Adjustment
Exchange adjustment
At 31 December 2018
Depreciation expense
Disposals
Acquisition
Exchange adjustment
At 31 December 2019
Net book value
At 31 December 2018
At 31 December 2019
Short leasehold property
£000
IT hardware & software
£000
78
29
(10)
(4)
1
94
14
(34)
-
(2)
72
60
4
(3)
4
1
66
7
(33)
-
(1)
39
28
33
893
116
(32)
562
5
1,544
77
(1)
79
(17)
1,682
612
140
(32)
549
3
1,272
148
(1)
75
(16)
1,478
272
204
Total
£000
971
145
(42)
558
6
1,638
91
(35)
79
(19)
1,754
672
144
(35)
553
4
1,338
155
(34)
75
(17)
1,517
300
237
In 2018 there was an adjustment in cost of £0.6m and depreciation of £0.6m to align the financial statements to the
underlying asset registers. The impact on net book value was nil.
8 0
15. I N V E N T O R I E S
Group
Work in progress
Total gross inventories
2019
£000
36
36
2019
£000
36
2018
£000
37
37
2018
£000
37
The inventory consists of high-quality industrial-standard cameras and associated hardware for the Instem Sorcerer
Colony Counter product.
In 2019, a total of £0.02m (2018: £0.04m) of inventory was included in profit or loss as an expense. This includes an
amount of £nil (2018: £nil) resulting from write-down of inventories.
16. T R A D E A N D O T H E R R E C E I VA B L E S
Group
Trade receivables
Amounts recoverable on contracts
Prepayments and accrued income
Company
Amounts owed by group companies
Other receivables
2019
£000
4,376
1,365
1,180
6,921
4,861
140
5,001
2018
£000
3,786
2,807
1,214
7,807
3,010
121
3,131
An allowance has been made for estimated credit losses from trade receivable and amounts recoverable on contracts
as per below:
An analysis of the provision for impairment of receivables is as follows:
Group
At beginning of year
Increase in provision for impairment
Reversal of provision for impairment
At end of year
2019
£000
54
161
-
215
2018
£000
73
1
(20)
54
8 1
16. T R A D E A N D O T H E R R E C E I VA B L E S ( C O N T I N U E D )
Definition of default
A loss allowance on all financial assets is measured by considering the probability of default.
Receivables are considered to be in default based on an assessment of past payment practices over a 5 year period prior
to 31 December 2019 and the likelihood of such overdue amounts being recovered.
Impairment of trade receivables
The probability of default is determined at the year-end based on the ageing of the receivables and historical data
about default rates. That data is adjusted if the Group determines that historical data is not reflective of expected
future conditions due to changes in the nature of its customers and how they are affected by external factors such as
economic and market conditions.
The calculated simplified expected credit loss of trade receivables is deemed immaterial in the current year (2018:
immaterial). The directors therefore do not deem it necessary to increase the impairment provision which is in relation
to specific credit-impaired receivables.
The average credit period taken on sale is 61 days (2018: 83 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.
Impairment of amounts owed by group companies
The Company assesses the expected credit loss in respect of group receivables based on their ability to repay and
recover the balance. In the absence of agreed terms this consideration is given over the expected period of repayment
and any expected credit loss. As at the period end the Company has made a provision of £0.8m for credit impairment
of amounts owed by group companies (2018: £nil).
The age profile of the net trade receivables for the Group at the year-end was as follows:
Debt age
Group
2019
Current
0-30 days
31-60 days
Trade receivables/Amounts recoverable on contracts
Value (£000)
3,654
1,063
%
64
18
451
8
Debt age
Group
2018
Current
0-30 days
31-60 days
Trade receivables/Amounts recoverable on contracts
Value (£000)
4,061
1,904
%
62
29
216
3
Over 60
days
573
10
Over 60
days
412
6
Total
5,741
100
Total
6,593
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.
8 2
17. C A S H A N D C A S H E Q U I VA L E N T S
Group
Cash at bank
Bank overdraft
Company
2019
£000
14,955
(8,998)
5,957
2018
£000
12,570
(8,998)
3,572
Cash at bank
1,128
643
The Group’s overdraft facility has a net limit of £0.5m and a gross limit of £9.0m. Interest is charged on the bank
overdraft at 3.0% above base rate. The bank overdraft is secured by fixed and floating charges over certain of the
Group’s assets and is repayable on demand.
Cash and cash equivalents in the statement of financial position includes a bank overdraft of £9.0m (2018: £9.0m) as
noted above. An offset position is reported as the Group has a legal right to set off and any settlement would be on a
net basis.
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
2019
£000
355
737
1,535
1,924
1,406
5,957
1,128
1,128
2018
£000
(226)
105
1,597
1,629
467
3,572
643
643
The carrying amount of these assets approximates to their fair value.
8 3
18. T R A D E A N D O T H E R P A YA B L E S
Group - Current
Trade payables
Other taxation and social security costs
Accruals
Company - Current
Trade payables
Amounts owed to group companies
Accruals
2019
£000
912
183
1,567
2,662
275
6,051
333
6,659
2018
£000
589
205
1,362
2,156
165
4,271
159
4,595
The directors consider that the carrying amount of trade and other payables approximates to fair value due to their
short maturities.
19. D E F E R R E D I N C O M E
At beginning of year
Increase on acquisition of Leadscope Inc.
Increase/(Decrease)
At end of year
2019
£000
8,625
818
(501)
8,942
2018
£000
10,967
-
(2,342)
8,625
Deferred income relates to consideration received from customers in advance of work being completed plus
maintenance and support which is invoiced in advance.
2 0 . C U R R E N T T A X A T I O N
The Group current tax receivable of £1.2m and payable of £0.4m (2018: receivable of £1.0m and 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 (2018: £nil).
8 4
2 1 . F I N A N C I A L L I A B I L I T I E S
An analysis of financial liabilities as presented in the statement of financial position is as follows:
Lease liability
Deferred consideration
Current liability
Deferred consideration
Contingent consideration
Non current liability
2019
£000
18
283
301
2019
£000
275
284
559
2018
£000
34
-
34
2018
£000
18
-
18
The deferred consideration and contingent consideration above is in respect of the acquisition of Leadscope Inc,
which was purchased on 15 November 2019 (Note 11).
The financial liability maturity analysis is disclosed in the table below.
2019
1 year or less
£000
1 to 2 years
£000
2 to 5 years
£000
Lease liability
Deferred consideration
Contingent consideration
18
283
-
301
-
275
-
275
-
-
284
284
2018
1 year or less
£000
1 to 2 years
£000
2 to 5 years
£000
Lease liability
34
18
-
Total
£000
18
558
284
860
Total
£000
52
8 5
2 2 . F I N A N C I A L I N S T R U M E N T S
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values
The table below analyses financial instruments into a fair value hierarchy based on the valuation technique used to
determine fair value
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable input).
2019
Group and Company
Carrying amount
£000
Fair value
£000
Contingent consideration
284
284
2018
Group and Company
Carrying amount
£000
Contingent consideration
-
Fair value
£000
-
Level 3
£000
284
Level 3
£000
-
Measurement of fair value of financial instruments
The following valuation technique is used is used for instruments categorised as Level 3:
Contingent consideration (Level 3) – the fair value of contingent consideration related to the acquisition of Leadscope
Inc (Note 11) is estimated using a present value technique. The £284,000 fair value is estimated by probability weighting
the estimated future cash outflows, adjusting for risk and discounting at 13.4%. The probability weighted cash outflows
before discounting are £388,000 and reflect management’s estimate of a 100% probability that the contract’s target level
will be achieved. The discount rate used is 13.4% representing the Group’s weighted average cost of capital (WACC),
with has been calculated by external valuation specialists.
The reconciliation of the carrying amounts of financial instruments classified as Level 3 is as follows:
Balance as at 1 January
Arising on business combination
Payment of contingent consideration
Unwinding discount
Balance as at 31 December
2019
£000
-
284
-
-
284
2018
£000
188
-
(200)
12
-
8 6
2 2 . F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D )
The Group is exposed to various risks in relation to financial instruments. Each of these is disclosed in the table below.
Carrying
amount
2019
£000
Fair value
2019
£000
Level 3
2019
£000
Carrying
amount
2018
£000
Fair value
2018
£000
Level 3
2018
£000
Loans and receivables
Cash and cash equivalents
Trade and other receivables
5,957
6,921
5,957
6,921
Financial assets measured at amortised cost
12,878
12,878
Financial assets measured at fair value
-
-
Total financial assets
12,878
12,878
Financial liabilities measured at amortised cost
Trade payables and accruals
(2,479)
Financial liabilities measured at amortised cost
(2,479)
Contingent consideration
Financial liabilities measured at fair value
(284)
(284)
(2,479)
(2,479)
(284)
(284)
-
-
-
-
-
-
-
(284)
(284)
3,572
7,807
3,572
7,807
11,379
11,379
-
-
11,379
11,379
(1,951)
(1,951)
-
-
(1,951)
(1,951)
-
-
-
-
-
-
-
-
-
-
-
Total financial liabilities
(2,763)
(2,763)
(1,951)
(1,951)
Total financial instruments
10,115
10,115
9,428
9,428
CREDIT RISK
Financial risk management
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 Group generates
external revenue from no customer that individually amounts to more than 10% of the Group revenue. At the 2019
year end the Group had a maximum credit risk exposure of £6.9m (2018: £7.8m).
The amounts presented in the statement of financial position are net of impairment provisions.
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 16 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.
The Group undertakes procedures to determine whether there has been a significant increase in the credit risk of
its other receivables, including group balances, since their initial recognition. Where these procedures identify a
significant increase in credit risk, the loss allowance is measured based on the risk of a default occurring over the
expected life of the instrument rather than considering only the default events expected within 12 months of the year-
end.
8 7
2 2 . F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D )
The concentration of credit risk for trade receivables at the balance sheet date by geographical region was:
UK
Europe
USA
China
Rest of World
2019
£000
1,766
146
1,401
644
419
4,376
2018
£000
2,026
83
1,159
505
13
3,786
LIQUIDITY RISK
Financial risk management
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 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 2019, its £0.5m
bank facility was undrawn (2018: £0.5m undrawn). The Group had positive cash reserves of £6.0m at the 2019 year
end, in addition to the £0.5m undrawn working capital facility, although £1.9m of the cash was held in bank accounts
in China, where it has been traditionally harder to repatriate funds quickly. There are no long term restrictions on the
transfer of funds from the Group bank accounts in China.
The following are the contractual maturities of financial liabilities.
2019
Non derivative financial liabilities
Carrying
amount
£000
Contractual
cashflows
£000
1 year or less
£000
2 to 5 years
£000
After 5 years
£000
Liabilities relating to right of use assets
2,569
Lease liabilities
Trade payables
18
912
3,499
2,569
18
912
3,499
565
18
912
1,950
-
-
1,495
1,950
54
-
-
54
2018
Non derivative financial liabilities
Carrying
amount
£000
Contractual
cashflows
£000
1 year or less
£000
2 to 5 years
£000
After 5 years
£000
Lease liabilities
Trade payables
52
589
641
52
589
641
34
589
623
18
-
18
-
-
-
8 8
2 2 . F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D )
MARKET RISK
Market risk - Foreign currency 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.
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 £0.1m (2018: £0.1m).
The Group’s exposure to foreign currency risk is as follows.
2019
Sterling
£000
Cash and cash equivalents
Trade and other receivables
Liabilities relating to right off use assets
Lease liabilities
355
2,804
(666)
(18)
Trade payables
(574)
Net exposure
1,901
2018
Cash and cash equivalents
Trade and other receivables
Sterling
£000
(226)
2,887
Lease liabilities
(52)
Trade payables
(391)
Net exposure
2,218
Euro
£000
737
188
(309)
-
(14)
602
Euro
£000
105
171
-
(40)
236
US Dollars
£000
Renminbi
£000
1,924
716
(16)
-
-
1,535
2,636
(730)
-
(330)
3,111
Other
£000
1,406
577
(848)
-
6
2,624
1,141
US Dollars
£000
Renminbi
£000
Other
£000
1,597
3,866
-
(155)
5,308
1,629
718
-
-
2,347
467
165
-
(3)
629
Total
£000
5,957
6,921
(2,569)
(18)
(912)
9,379
Total
£000
3,572
7,807
(52)
(589)
10,738
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 2019, 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 2019 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).
8 9
2 3 . D E F E R R E D T A X ( C O N T I N U E D )
Group
Deferred tax asset
Amounts due to be recovered within 12 months
Amounts due to be recovered after 12 months
Total deferred tax liability
The movement in the year in the Group’s net deferred tax position was as follows:
At beginning of the year
Net charge to income for the year
Net debit to Other Comprehensive Income (OCI)
Net debit to goodwill arising on acquisitions during the year
Adjustments in respect of prior years
At end of the year
2019
£000
-
(506)
(506)
2019
£000
(12)
(166)
(6)
(311)
(11)
(506)
2018
£000
-
(12)
(12)
2018
£000
393
(101)
(221)
-
(83)
(12)
The following are the major deferred tax assets and liabilities recognised by the Group and the movements thereon
during the year:
Accelerated
tax
depreciation
£000
Tax losses
£000
Retirement
benefit
obligations
£000
Other timing
differences
£000
Deferred tax asset/(liability)
At 1 January 2018
Credit/(charge) to profit or loss for the year
Debit to OCI for the year
Adjustments in respect of prior years
(658)
132
-
-
At 31 December 2018
(526)
Credit/(charge) to profit or loss for the year
Debit to OCI for the year
116
-
Debit to goodwill arising on acquisitions during the year
(311)
Adjustments in respect of prior years
-
At 31 December 2019
(721)
694
(257)
-
-
437
(229)
-
-
187
395
638
(34)
(221)
-
383
(70)
(6)
-
-
307
(281)
58
-
(83)
(306)
17
-
-
(198)
(487)
Total
£000
393
(101)
(221)
(83)
(12)
(166)
(6)
(311)
(11)
(506)
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 2019 were £0.2m (2018: £0.3m) due to uncertainty over the
timing of the recoverability of these losses.
9 0
2 4 . R E T I R E M E N T B E N E F I T O B L I G A T I O N S
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 2019 were £0.65m (2018: £0.53m).
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 2019 were £0.03m (2018: £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 2019 were £0.18m (2018: £0.16m).
BIOWISDOM GPP SCHEME - the Scheme is a Group Personal Pension arrangement with AVIVA 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 2019 were £0.01m (2018: £0.02m).
Defined benefit pension scheme
The Group also operates a defined benefit pension arrangement called the Instem LSS Pension Scheme (the Scheme).
The Scheme provides benefits based on final salary and length of service on retirement, leaving service or death. This
scheme was closed to new members with effect from 8 October 2001.
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 meet the Statutory
Funding Objective. The future contributions required to meet the Statutory Funding Objective do not currently affect
the statement of financial position of the Scheme in these accounts.
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’s assets. The Trustees delegate some of these functions to their professional advisors where
appropriate.
The Scheme exposes the Group to a number of risks:
•
•
•
Investment risk. The Scheme holds investments in asset classes, such as equities, which have volatile market values
and while these assets are expected to provide the real returns over the long-term, the short-term volatility can
cause additional funding to be required if a 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 most recent comprehensive actuarial valuation was carried out at 5 April 2017 and the next valuation of the
Scheme is due at 5 April 2020. In the event that the valuation reveals a larger deficit than expected the Group may be
required to increase contributions above those set out in the existing Schedule of Contributions. Conversely, if the
position is better than expected, it is possible that contributions may be reduced.
9 1
2 4 . R E T I R E M E N T B E N E F I T O B L I G A T I O N S ( C O N T I N U E D )
The following schedule of contributions was prepared by the Trustees of 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 2018:
Period ended
31 March 2020
31 March 2021
31 March 2022
31 March 2023
31 March 2024
30 October 2024
Monthly payment (payable in each month except the
final month in each period) £’000
Balancing payment due before period end £’000
25
25
25
25
25
25
237
255
273
293
313
193
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 net interest on the net defined benefit liability 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.
Discount rate (pa)
Inflation (RPI) (pa)
Inflation (CPI) (pa)
Rate of increase in salaries
Rate of increase in pensions in payment
2019
%
2.20
2.80
1.80
N/A
2.70
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
23.7
24.8
22.7
23.6
2019
£000
316
(376)
(60)
2018
%
3.00
3.10
2.00
N/A
3.00
Years
24.1
25.2
23.1
24.0
2018
£000
212
(384)
(172)
9 2
2 4 . R E T I R E M E N T B E N E F I T O B L I G A T I O N S ( C O N T I N U E D )
Pension schemes are legally required to equalise pension benefits for the effects of unequal Guaranteed Minimum
Pensions (GMPs) between males and females that were accrued since May 1990. The Group has included a reserve
of £nil in 2019 for the cost of GMP equalisation (2018: £0.1m). This amount is charged to non-recurring costs in the
Statement of Comprehensive Income.
ANALYSIS OF AMOUNT RECOGNISED IN OTHER COMPREHENSIVE INCOME/
(EXPENSE)
Gains/(losses) on pension scheme assets in excess of interest
Gains from changes to demographic assumptions
2019
£000
1,003
261
(Losses)/gains from changes to financial assumptions
(1,234)
Actuarial gain recognised in other comprehensive income/(expense)
30
CHANGES IN THE PRESENT VALUE OF THE DEFINED BENEFIT OBLIGATION
2019
£000
Opening defined benefit obligation
12,655
Interest cost
Past service cost and GMP reserve
Benefits paid
Experience gain on liabilities
Changes to demographic assumptions
Changes to financial assumptions
376
-
(231)
-
(261)
1,234
Closing defined benefit obligation
13,773
CHANGES IN THE FAIR VALUE OF PLAN ASSETS
2019
£000
Opening plan assets
10,406
Expected return
Return on plan assets less interest
Contributions by employer
Benefits paid
316
1,003
475
(231)
Closing plan assets
11,969
2018
£000
(957)
65
2,192
1,300
2018
£000
14,549
384
203
(224)
-
(65)
(2,192)
12,655
2018
£000
10,799
289
(957)
499
(224)
10,406
The actual return on plan assets was a positive return of £1.3m (2018: negative return £0.67m).
9 3
2 4 . R E T I R E M E N T B E N E F I T O B L I G A T I O N S ( C O N T I N U E D )
AMOUNT RECOGNISED IN THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
2019
£000
Present value of funded obligations
(13,773)
Fair value of plan assets
Net pension liability
Related deferred tax asset
Net pension liability after deferred tax
RECONCILIATION OF NET DEFINED BENEFIT LIABILITY
Opening net defined benefit liability
Net interest expense and GMP reserve
Remeasurements
Contributions by employer
Closing net defined benefit liability
11,969
(1,804)
307
(1,497)
2019
£000
2,249
60
(30)
(475)
1,804
2018
£000
(12,655)
10,406
(2,249)
383
(1,866)
2018
£000
3,750
298
(1,300)
(499)
2,249
ANALYSIS OF CUMULATIVE AMOUNT RECOGNISED IN OTHER COMPREHENSIVE
INCOME/(EXPENSE)
Cumulative
2019
£000
Cumulative
2018
£000
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
2,094
(1,628)
615
(4,422)
(3,341)
Actuarial gain recognised in other comprehensive income/(expense) in the period
30
1,091
(1,628)
354
(3,188)
(3,371)
1,300
MAJOR CATEGORIES OF PLAN ASSETS AS A PERCENTAGE OF FAIR VALUE OF TOTAL PLAN ASSETS
2019
2018
Equities
Property
Bonds
Corporate Bonds
Cash
Other
£000
7,277
655
1,109
1,799
338
791
%
61
5
9
15
3
7
£000
6,458
781
1,058
1,297
86
726
%
62
8
10
12
1
7
11,969
100
10,406
100
9 4
2 4 . R E T I R E M E N T B E N E F I T O B L I G A T I O N S ( C O N T I N U E D )
The five-year history of experience adjustments is as follows:
2019
£000
2018
£000
2017
£000
2016
£000
2015
£000
Present value of defined benefit obligation
(13,773)
(12,655)
(14,549)
(14,436)
(11,782)
Fair value of plan assets
11,969
10,406
10,799
9,690
7,849
Deficit
(1,804)
(2,249)
(3,750)
(4,746)
(3,933)
Experience gains on plan liabilities
-
Return on plan assets less interest
1,003
65
(957)
156
686
-
-
1,252
(136)
The Group expects to contribute £0.5m to its defined benefit plan in the next financial year (2018: £0.5m).
The following sensitivities apply to the value placed on the liabilities:
Adjustments to assumptions
Approximate effect on liabilities
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
£000
(1,101)
1,248
1,213
(1,079)
362
(348)
2 5 . P R O V I S I O N F O R L I A B I L I T I E S
At 1 January
Increase in provision during the year
At 31 December
2019
£000
250
-
250
2018
£000
250
-
250
The Group holds a provision of £0.25m (2018: £0.25m) in respect of historical contract disputes against a maximum
exposure estimated at approximately £1.5m. There are uncertainties around the outcome of contract disputes and any
settlements may be higher or lower than the amount provided. The directors believe the provision represents the best
estimate of the risks and considers all information and legal input received by the Group. The assumptions made in
relation to the current period are consistent with those in the prior year. The utilisation of this provision is anticipated
to be within 2 years.
9 5
2 6 . S H A R E C A P I T A L
ALLOTTED, CALLED UP AND FULLY PAID
At 1 January
15,917,931 ordinary shares of 10p each (2018: 15,886,660)
705,147 ordinary shares of 10p each (2018: 31,271), issued during the year
At 31 December
2019
£000
1,592
70
1,662
2018
£000
1,589
3
1,592
During the year 473,181 (2018: 31,271) shares were issued in respect of the exercise of share options.
2 7 . E A R N I N G S P E R S H A R E
Basic and diluted earnings per share
Basic earnings per share are calculated by dividing the profit attributable to ordinary shareholders by the weighted
average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the
weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the
share option scheme. The 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. The diluted loss per share
in 2019 is the same as basic loss per share as losses have an anti-dilutive effect.
Loss after tax
(£000)
Earnings per share - Basic
(923)
Potentially dilutive shares
-
Earnings per share - Diluted
(923)
2019
Weighted
average
number of
shares (000’s)
16,254
799
17,053
Loss per share
(pence)
Profit after tax
(£000)
(5.7)
-
(5.7)
1,470
-
1,470
2018
Weighted
average
number of
shares (000’s)
15,909
940
16,849
Earnings per
share (pence)
9.2
-
8.7
Adjusted earnings per share
Adjusted earnings per share is calculated after adjusting for the effect of foreign currency exchange on the revaluation of
inter-group balances included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised
development and amortisation of intangibles on acquisitions. Diluted adjusted earnings per share is calculated by
adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares
arising from the share option scheme. The dilutive impact of the share options is calculated by determining the
number of shares that could have been acquired at fair value (determined as the average market share price of the
Company’s shares) based on the monetary value of the subscription rights attached to the outstanding share options.
Adjusted
profit after tax
(£000)
Earnings per share - Basic
3,138
Potentially dilutive shares
-
Earnings per share - Diluted
3,138
2019
Weighted
average
number of
shares (000’s)
16,254
799
17,053
Adjusted
earnings per
share (pence)
Adjusted
profit after tax
(£000)
19.3
-
18.4
2,611
-
2,611
2018
Weighted
average
number of
shares (000’s)
15,909
940
16,849
Adjusted
earnings per
share (pence)
16.4
-
15.5
9 6
2 7 . E A R N I N G S P E R S H A R E ( C O N T I N U E D )
Reconciliation of adjusted profit before tax:
Reported (loss)/profit before tax
Non-recurring costs
Amortisation of acquired intangibles
Impairment of goodwill and capitalised development
Foreign exchange differences on revaluation of inter-group balances
Adjusted profit before tax
Tax
Adjusted profit after tax
2019
£000
(901)
302
523
3,175
61
3,160
(22)
3,138
2018
£000
1,677
539
788
-
(186)
2,818
(207)
2,611
2 8 . C A P I T A L A N D R E S E R V E S
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 and
the difference between the nominal value and share issue price of shares issued as consideration in the purchase
of Leadscope Inc
Share based payment reserve
The share based payment reserve represents the fair value of shares options periodically awarded to employees and
executive directors, which is charged to the statement of comprehensive income.
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.
9 7
2 8 . C A P I T A L A N D R E S E R V E S ( C O N T I N U E D )
The Group considers its capital to include share capital, share premium, merger reserve, share based payment reserve,
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.
2 9 . C A P I T A L C O M M I T M E N T S
There were no capital commitments at the end of the financial year (2018: £nil).
3 0 . R E L A T E D P A R T Y T R A N S A C T I O N S
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 £1.0m (2018: £1.0m). The net
intercompany balances due from the Company at the year-end totalled £0.3m (2018: due from: £1.3m).
During the year, the Group traded in its normal course of business with shareholders and consultancy businesses in
which Directors have a material interest as follows:
KEY MANAGEMENT COMPENSATION:
2019
£000
2018
£000
Group and Company
Fees for services provided as Non-Executive Directors
Salaries and short-term benefits
Employer's national insurance & social security costs
Group
Executive Directors
Salaries and short-term benefits
Post-employment retirement benefits
Employers’ national insurance & social security costs
Share based payment charge
120
13
133
359
43
29
21
452
Group
Other key management
Salaries and short-term employee benefits
1,047
Post-employment retirement benefits
Employers’ national insurance & social security costs
Share based payment charge
59
99
54
120
11
131
335
41
23
91
490
968
51
68
125
The Company paid £0.05m (2018: £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 (2018: £nil).
Key management are considered to be the Directors together with the Senior Managers of the business.
1,259
1,212
9 8
3 1 . C O N T I N G E N T L I A B I L I T I E S
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 (2018: £9.0m).
3 2 . S U B S E Q U E N T E V E N T S
No adjusting events have occurred between the 31 December reporting date and the date of approval of these financial
statements.
On 13th February 2020 it was announced that a member of the senior management team had exercised share options
over 50,714 ordinary shares of 10p each in the Company.
In January 2020 the Group informed its staff of its intention to implement an all-staff share and option scheme. The
scheme has subsequently been formally launched with staff receiving the right to 386,686 ordinary shares of 10p each
in the Company that will vest in April 2023.
Like most businesses worldwide the Group is having to deal with the impact of COVID-19, with its primary concern
being for the safety and wellbeing of its staff and their families. While the Group expects some disruption to demand
for its products and services there is also expected to be some increases in customer demand.
The uncertainty as to the future impact on the Group of the recent COVID-19 outbreak has been considered as part
of the Group’s adoption of the going concern basis. Thus far we have not observed any material impact on our overall
existing business or in the level of new business opportunities that are being presented to us in the markets in which
we operate. We have seen a little slippage in customers placing new business during the first quarter of 2020, but at
this stage it is too early to determine whether this is likely to be a long term issue or merely a temporary matter whilst
our customers are focused on managing their own businesses, with changes from introducing staff self-isolation and
working from home.
9 9
D I R E C T O R S A N D A D V I S O R S
D I R E C T O R S
D Gare (Non-Executive Chairman)
M F McGoun (Independent Non-Executive)
D M Sherwin (Non- Executive)
P J Reason
N J Goldsmith
S E C R E T A R Y
N J Goldsmith
R E G I S T E R E D O F F I C E
Diamond Way
Stone Business Park
Stone
Staffordshire
ST15 0SD
Tel: +44 1785 825600
Fax: +44 1785 825633
www.instem.com
Company No: 07148099
A U D I T O R
Grant Thornton UK LLP
4 Hardman Square
Spinningfields
Manchester
M3 3EB
B A N K E R
National Westminster Bank Plc
1 Spinningfields Square
Manchester M2 3AP
N O M I N A T E D A D V I S O R A N D B R O K E R
Nplus1 Singer Advisory LLP
One Bartholomew Lane
London EC2N 2AX
R E G I S T R A R S
Computershare Investor Services PLC
The Pavilions
Bridgewater Road
Bristol BS99 6ZZ
S O L I C I T O R S
Squire Patton Boggs (UK) LLP
No 1 Spinningfields
1 Hardman Square
Manchester M3 3EB
1 0 0
1 0 1
O U R C L I E N T S
O u r c l i e n t s
i n c l u d e t h e s e f i n e
o r g a n i s a t i o n s
1 0 2
I n s t e m s u p p o r t s i t s g l o b a l
r o s t e r o f c l i e n t s t h r o u g h
o f f i c e s i n t h e U n i t e d
S t a t e s , U n i t e d K i n g d o m ,
F r a n c e , J a p a n , C h i n a a n d
I n d i a .
1 0 3
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
1 0 4