2017 Annual Report
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STRATEGIC REPORT
Summary Results and Trends ........................................................................... 5
Chairman's Statement ....................................................................................... 6
Strategy and Market .......................................................................................... 7
Financial Review .............................................................................................. 13
GOVERNANCE
Directors and Advisors ..................................................................................... 16
Report on Directors' Remuneration ................................................................. 17
Directors' Report .............................................................................................. 20
Statement of Directors' Responsibilities .......................................................... 22
FINANCIAL INFORMATION
Auditors' Report ............................................................................................... 23
Consolidated Financial Statements ................................................................. 29
Notes to the Financial Statements................................................................... 33
Sopheon and Accolade are registered trademarks of Sopheon plc.
Microsoft, Excel, SharePoint and PowerPoint are registered trademarks of the Microsoft Corporation in the United States and/or in other countries.
Stage-Gate is a registered trademark of the Product Development Institute, Inc.
Sopheon’s mission is to help our customers
achieve exceptional long-term growth and
profitability through sustainable innovation.
We do this by digitalizing enterprise innovation through software, services and
best practices that help companies operate with success.
Our solutions connect people, systems and information, helping companies
better execute on business strategy and improve the return on their investments
into initiatives such as enterprise innovation, product development, transformational
change, supply chain efficiencies and cost reduction.
These solutions are designed to keep strategy visible and continuously aligned
with operational execution throughout the initiative life cycle, ensuring long-term
market success. The transparency and insight they provide support speed, agility
and adaptability – all critical enterprise capabilities in the digital era – and enable
decision-making that drives better business outcomes.
Strategic
Innovation
Planning &
Roadmapping
Strategy
Execution
Idea/
Concept
Development
Innovation
Process &
Program
Management
Portfolio
Optimization
& Resource
Management
REVENUE
EBITDA
RECURRING REVENUE
2017
2017
2017
2016
$28.5m
2016
$8.0m
2016
$12.1m
2015
$20.9m
$23.2m
2015
$4.1m
$5.2m
2015
$8.2m
$9.9m
EBITDA in 2016 was $5.6m if exceptional
exchange gains are included.
First to introduce smart
technologies and PPT
on a single click
First to embed
graphical “product
life cycle” stages
PPT
XLS
DOC
MPP
First to implement
enterprise-wide,
fully-integrated
Innovation Planning
and Roadmapping
First to embed 30 years
of best-practice
know-how
First to introduce
integrated roadmapping,
planning, execution,
ideation and portfolio
in one solution
First to
automate
Stage-Gate®
First and only to provide a
genetic (learning) algorithm to
assist with portfolio alignment
(smart optimization)
First to embed proactive
knowledge discovery
High-Tech Electronics
Aerospace & Defense
Chemicals
Food & Beverage
Consumer Goods
Industrial Manufacturing
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STRATEGIC REPORT
C H A I R M A N ' S S T A T E M E N T
In conjunction with a truly exceptional financial performance in 2017, we continue to advance
our strategy to be the world’s leading provider of enterprise-class innovation management
solutions. Our vision has consistently led this market, and an increasing number of notable
global corporations are choosing to partner with Sopheon to help them execute on their
strategy and innovation priorities. Rising momentum and market recognition delivered a very
strong finish to the year, resulting in revenues, EBITDA and other profit measures all exceeding
market expectations by a significant margin. Revenues rose to $28.5m from $23.2m in 2016.
On the back of an already strong increase in profitability in 2016, it is very gratifying to report that
EBITDA1 last year reached $8.0m, up from $5.6m the year before, and that we achieved profit before tax of $5.1m,
compared to $3.0m the year before. Alongside a realignment of our debt position, this resulted in net assets rising to
$18.6m from an already very solid $10.4m the year before, and net cash rising to $9.5m from $4.2m the year before.
Both volume and average value of license transactions increased compared to 2016. In particular, performance
last year included the signing of two very substantial deals in the final quarter in the USA and in Germany, each
with a multinational enterprise that is an undisputed leader in its field, which contributed materially to the overall
outperformance. Such customers further validate the acceptance of our Accolade® solution as an enterprise platform
within the largest and most influential of corporations. We saw more acceptance of our SaaS (Software as a Service)
offering, with three new SaaS customers signed last year. The strengthening recurring revenue base, along with the
strong sales bookings at the end of 2017, has resulted in 2018 revenue visibility2 now at $19.3m as compared to
$14.5m last year. This is a tremendous start to the new year, which we will build on by executing our growth strategy in
three distinct areas, and which gives us the confidence to accelerate our investment program in 2018.
First, we seek to capitalize on existing blue chip client relationships to extend Accolade as the digital platform of choice
to empower enterprise adaptability across a global organization. This ambition extends our sights beyond new product
innovation to areas such as management of capital expenditure, corporate initiatives, and intellectual property. With
this in mind, our three Accolade releases last year focused our platform development on scalability, security, knowledge
discovery and transparency; aggressive and innovative product development will remain a key area of investment going
forward.
The second growth priority is to continue to target industries through deeper specialization and domain-specific
expertise. We continued to win business and customers in our target sectors − consumer products, chemicals,
aerospace and defense, and high-tech. Sopheon was recognized as the top software vendor in our solution category
by CGT magazine, underlining our strength in consumer products in particular. In addition, we continued to assess new
verticals on the back of initial customer wins in insurance, apparel and auto-parts but are yet to make a concerted push
in these areas.
Third, we are working to multiply our growth rate through distribution partnerships – channel, strategic and geographical –
to develop and monetize an Accolade ecosystem.
Sopheon is the only vendor recognized in all of the following Market Guides by Gartner: Strategy Execution Management
Software, Innovation Management Tools, Strategic & Innovation Roadmapping and Product Roadmapping, as well as
its Magic Quadrant for Project Portfolio Management Worldwide. In addition, Sopheon has now been recognized as a
leader in the Forrester Wave™: Strategic Portfolio Management Tools. Collectively, these are major strategic milestones in
establishing both our company and our market.
As we reflect on a third and unprecedented year of success for Sopheon, we are more determined than ever to make
sure that Sopheon strengthens its leadership position in our rapidly evolving market. In order to deliver on the growth
strategies that I have outlined, we have ambitious investment plans for 2018 involving product, people and process.
Where appropriate, this will also include consideration of targeted M&A opportunities when consistent with our goals
and criteria. Alongside strategic initiatives, we remain highly driven by revenue and profit objectives. To emphasize this,
the board has decided to propose a maiden dividend and will put this to members at the next annual general meeting
to be held in June this year.
Barry Mence
Executive Chairman
21 March 2018
1 EBITDA is defined and reconciled in Note 4 to the financial statements.
2 Revenue visibility comprises revenue expected from (i) closed license orders, including those which are contracted but conditional
on acceptance decisions scheduled later in the year; (ii) contracted services business delivered or expected to be delivered in the
year; and (iii) recurring maintenance, hosting and rental streams. The visibility calculation does not include revenues from new
sales opportunities expected to close during the remainder of the year.
STRATEGIC REPORT
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S T R A T E G Y A N D M A R K E T
In this section, our CEO Andy Michuda provides more details on Sopheon’s mission,
differentiation, and principal growth strategies. A summary of the principal risk areas facing
the business is set out in the Directors’ Report. Further analysis of Sopheon’s financial
results during the year, including a review of the business, the financial position at the end of
the year, key indicators, and an overview of key corporate developments are set out in the
Financial Review.
What We Do
Sopheon’s mission is to help our customers achieve exceptional long-term growth and profitability through
sustainable innovation. We accomplish this by digitalizing corporate innovation with software and services that align
and connect organizations, embed best-practice innovation processes, and enable corporate speed, agility and
adaptability.
Many market-leading corporations are challenged to compete in today’s fast-moving environment due to a complex
operational infrastructure that has been built up over time. A multitude of stand-alone systems supporting different
functional groups have created isolated pockets of information, which today prevent companies from responding
quickly to external market changes with sound, fact-based decisions. This is compounded by the fact that many
of these traditional industry leaders are operating with outdated and disconnected twentieth-century tools while
attempting to compete in the twenty-first century digital era, putting them at risk of finding themselves on the wrong
side of what research indicates is a growing digital divide separating today's winners and losers.
Sopheon believes one cannot win today without digitalizing corporate innovation strategies, initiatives and
activities. Through our end-to-end innovation platform that links an organization’s strategic ambition with the
operational execution activities required to realize that strategy, Sopheon's software solutions enable three critical
transformational corporate capabilities:
1. The shift from a static annual planning cadence to an ongoing and iterative one.
2. An improved rate of performance against funded strategic initiatives.
3. The transition from siloed knowledge workers to interconnected, cross-functional work teams performing in
context of strategic objectives.
Three Operational Business Transformations
Global
Digitalization
Power of the
Consumer
1010101010101
10101010101010
1010101010101
1. Annual planning becomes dynamic and iterative
2. Strategic initiatives must be realized at a higher rate
3. Work teams must be cross-functional and “connected”
The digital movement has fundamentally changed the role of corporate innovation, forcing a move away from the
decades-long, narrow focus on research and development (R&D) management to a broader, more interconnected
Enterprise Innovation Management (EIM) competency.
Digitalizing EIM allows companies to cut through the complexity of reacting to ever-changing market needs while
improving and increasing the rate of innovation. New technologies, products and services are strategically aligned
with long-term growth goals, market requirements, industry regulations, and supplier competencies. In addition, a
CEO's strategic direction and strategic pivots can now be driven, propagated, managed, tracked and realized with a
velocity that could not be accomplished without an EIM platform in place.
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STRATEGIC REPORT
Sopheon clients benefit from any or all of four distinct yet tightly linked solutions offered from a single EIM platform,
depending on their area of need and level of innovation maturity.
• Strategic planning and alignment of long-term Innovation Plans, engaging teams from marketing, research
and development, finance, supply chain, sales and manufacturing to all work collaboratively in the common
interest of the corporate strategy.
• Generation and development of higher-value Ideas and Concepts to fill key gaps relevant to achieving
strategic initiatives.
• Facilitation of improved Cross-Functional Team Work that enables collaboration and tracks progress against
key initiatives in context of corporate strategy.
• Data management, analytics and integrity tools to improve Portfolio Optimization, which ensures the best
return on innovation investments.
How do we get more
from our portfolio?
Is our portfolio achieving
our performance goals?
Should this initiative move
forward for launch?
Should this initiative move
into development?
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What plans do we create to
achieve business objectives?
Which strategies
will we pursue?
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Which ideas/concepts support
our strategic objectives?
Which ideas/concepts
are viable initiatives?
The following value has been derived by Sopheon customers following implementation of Sopheon’s EIM software:
• Reduced Time to Market: One customer reduced cycle time by over 30 percent through process efficiencies
and sharing information, while significantly reducing the average team size.
• Improved Success Rate: Another customer reduced its new product failure rate by over 55 percent, and a
continued focus on list of “top ten” new product projects ensures they continue to meet success criteria.
• Increased Portfolio Value: Parker Hannifin reduced the number of projects in their portfolio by 50 percent and
increased the portfolio value by 500 percent.
• Increased Throughput: One customer increased the revenue from new products released to the market by
25 percent without additional resources.
Industry Trends
We see a continuing convergence of business, economic and market trends that create unique growth opportunity,
given Sopheon’s market position, solutions and investments. Statistics suggest that 75 percent of the S&P 500
will no longer be on the list by 20273 and we are witnessing a sea change in that many of the most successful
companies in the world recognize the need for urgent transformation to remain relevant to their customers in the
digital era. Sopheon believes that digitalizing the enterprise innovation operating model is now accepted by many as
a “must have” to survive and win.
The primary challenge for these market leaders is to transform their operating model from what once served their
historical success, to a new operating model that leverages the strength of their assets and capabilities while at the
same time allows them to operate with the nimbleness and flexibility of small start-ups. This is commonly referred to
as digital transformation. Following are several examples of this trend, quoting directly from public websites:4
STRATEGIC REPORT
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• “[P&G is] putting strategies and capabilities into place to transform
P&G into a faster-growing, more profitable and far simpler
company.” 5
• “[Conagra Brands is] transforming the way we operate to
fulfill what consumers and customers want, in a smart,
simple way. We’re modernizing our iconic food brands,
leveraging fresh opportunities and adapting to a
changing landscape – all with a culture that’s ready
to capture growth and drive shareholder value.” 6
• “[PepsiCo is] constantly pushing ourselves to
transform, because in a world defined by
increased volatility, complexity and speed,
it is the only way to succeed.” 7
• “A sizable and growing customer
Startups More Able to Raise $1B+ to Challenge Incumbents
Source: Innovation Leader, 2016
segment is looking for organic and
natural products, and as a result,
packaged food companies are facing a relevance problem. One company that has done well in this difficult
and changing environment is General Mills…General Mills was able to gain relevance in this important growth
segment for one reason: They saw a relevance challenge early and responded with acquisitions, investments in
products and programs, and a sense of direction powered by their mission and values.” 8
• “[Speed] is everything – including the speed at which we learn, the speed at which we execute, and the speed
at which we pivot. To that end, we have prioritized speed and agility in our people, in our processes, and in the
tools we use to iterate with our customers and partners.… [We] can’t succeed by creating speed and agility in a
vacuum – our transformation roadmap must bring the entirety of GE into the digital world.” 9
Continued Market Momentum and Validation
Sopheon felt a market shift in 2017 in several areas, all of which give us
confidence and optimism for the future.
• Highest value new client orders in the history of the company:
The 2017 revenue contribution from first-time clients was higher
than ever before at $6.9m compared to $3.9m in 2016. We believe
this accomplishment was validation of the increasing enterprise
transformation and urgency for growth initiative realization described
above. Another factor is the market recognition that our software
platform meets the expanding enterprise innovation needs beyond
“product innovation” to include new areas such as, but not limited to,
corporate initiative management, intellectual property management, cost
improvement, and IT project and portfolio management; all of which
contributed to this increase in order value.
• Increased interest and coverage by software business
"The Accolade application
is improving our focus on growth
projects aligned to the market
needs as well as our efficiency in
development and bringing new
products to market. We see it as
an important tool that will underpin
our future growth strategy."
Jennifer Lewis, Head of Portfolio,
Certis Europe
analysts: We saw a record number of referrals from respected
industry analysts Gartner and Forrester year over year, as well as
an increase in requests for briefings to learn more about our company, software and services, which resulted in
coverage in nine new industry research initiatives. Highlights of 2017 coverage:
- Forrester named Sopheon a “Leader” in Strategic Portfolio Management in their Q3 2017 report on
vendors providing agile tools to drive digital transformation.
- Gartner named Sopheon in research across all four primary Enterprise Innovation Management solution
areas, including Market Guides or Magic Quadrants on Strategy Execution Management Software,
Strategic & Innovation Roadmapping, Product Roadmapping, Project Portfolio Management and Innovation
Management.
- Sopheon was the only vendor that was common across all of the above stated areas.
• Named “Best in Category”: We are very proud to be voted a Top 10 technology solution provider for new product
development and introduction (NPDI) by executive readers of Consumer Goods Technology magazine for the
eighth consecutive year. As part of the publication’s annual Readers’ Choice Survey, executives from consumer
goods organizations are asked to identify the NPDI solutions that best support their efforts to deliver new products
to market, as well as their satisfaction levels with each provider. In the last such survey, industry executives rated
Sopheon and our Accolade® Enterprise Innovation Management software as the top solution in this category.
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STRATEGIC REPORT
• Highest client retention in company history: We continued an upward trend of increased client retention,
reaching 95 percent (up from 94 percent). This is an indicator of higher adoption and perceived value by our
clients.
• Met or exceeded client expectations: As in the year before, we were thrilled to have met or exceeded client
expectation in 100 percent of cases during check-in reviews with client executive sponsors conducted six
months after software “go live”.
• Record fourth quarter results: Fourth quarter revenue exceeded $10m (2016: $6.9m).
What Makes Sopheon Different
Innovation Specialists with Deep Experience working with World Leaders
Sopheon’s legacy is rooted in innovation management and our corporate mission has never wavered from
helping our customers achieve long-term growth and profitability through sustainable innovation. This conviction
and passion has earned us a unique, differentiated position in our target markets. One hundred percent of our
efforts − from product to support to consulting and training − have been directed to deepening our competency in
innovation management. World leaders like PepsiCo, Parker, P&G, BASF, Tetra Pak, Juniper, Honeywell and many
others have put their trust in partnership with Sopheon as they navigate the industry threats and opportunities
of digitalization, consumer power and other external market disrupters. Sopheon’s longevity working with these
companies has provided a one-of-a-kind accumulation of learning and experience that distinguishes our people,
process and technology.
"The partnership
and working spirit [are]
the reasons we've kept
this relationship going for
over a decade now."
Our clients expect Sopheon to share this domain expertise to assist them in improving
their innovation performance. We continue to develop our consultancy depth and
competency to support our continued growth, and expect our enduring focus and
investment in our people to continue to separate Sopheon from the competition
through 2018 and beyond.
The combination of deep domain knowledge of Sopheon’s people with the
increased operational value that Accolade delivers is resonating with global industry
leaders as they turn to Sopheon for partnership.
An Ecosystem of Clients that Collaborates to Make One Another Stronger
Bill Beane, Sr. Director,
Corporate Technology Ventures &
Innovation Systems,
Parker Hannifin
Sopheon’s solutions have been implemented by over 250 customers with over
60,000 users in over 50 countries. Our client base of global innovation leaders
has grown to be an additional differentiator for us as our clients increasingly benefit
through collaboration, sharing and learning across this ecosystem.
An Enterprise Innovation Management Platform that Connects Strategic Planning and Operational
Execution with Proven Enterprise Scale
• Sopheon pioneered a centralized, 'single source of truth' system of record that connects corporate strategy
with corporate execution. With Accolade, cross-functional internal groups and external stakeholders all
contribute information to and extract insight out of the same system, improving the speed and quality of the
decision-making cadence.
• Sopheon is the only vendor named in the Forrester Wave™: Strategic Portfolio Management, Gartner’s Market
Guide for Strategy Execution Management Software, and Gartner’s two roadmapping Market Guides (Strategy
& Innovation Roadmapping, and Product Roadmapping). In our view, this strongly validates Sopheon’s
unique capability to manage three critical enterprise areas, namely strategic planning, portfolio management,
and strategy execution. Of note is that we accomplish this with a single software platform. This is a further
differentiator for us at a time when companies are looking to simplify corporate complexity by reducing the
number of stand-alone information systems they rely on to be successful, all requiring integration efforts to
work together.
STRATEGIC REPORT
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• Sopheon has demonstrated unique enterprise scalability by deploying Accolade across some of the world’s
most complex companies and largest, most highly visible brands. Below are a few figures from across our
customer base that illustrate the scalability of the Accolade software:
- Over 60,000 active projects on a single Accolade instance
- Up to 6,000 projects in a single “what-if” portfolio scenario
- Over 11,000 licensed users across a single organization
- Over 1,000 people resources in a single portfolio within a single client account
Continuous Product Advancement
We continue to invest in our Accolade product, with a roadmap that regularly delivers three new releases per
annum. Our roadmap priorities come from three sources:
1. Client requirements captured through our customer insights and client forum programs.
2. Market requirements reported by our commercial facing teams.
3. Our internal strategic roadmap.
In 2017 we delivered on three product releases as per our usual cadence with
market announcements as follows:
• 23 February 2017 – Accolade 11.1 – Focus of this release: Accolade bolsters
a visible connection between strategy and operational activities for increased
alignment and employee engagement.
• 6 July 2017 – Accolade 11.2 – Focus of this release: Accolade offers new
predictive analytics and knowledge discovery capability to enable actionable
insights.
• 16 November – Accolade 11.3 – Focus of this release: Accolade intelligently
alerts product leaders on variances from established targets and forecasts to
increase performance transparency and support market success.
"With the
Accolade software
we are able … to
make better and more
effective strategic
decisions."
Steven Moskowitz, Manager,
Strategic Innovation,
Entegris Inc.
In addition, we continue to make continued progress in both quality and security of our product platform to stay
current with evolving enterprise application requirements.
• Security of systems and information is a “must have” capability in the enterprise software market, and even
more so for enterprise software that supports strategic execution and innovation. There is no information that
is more closely linked to an organization’s competitive position and therefore more sensitive than this. At the
same time, today’s fast-paced and highly competitive market demands more openness and collaboration than
ever before. We have separated ourselves from the competition in successfully providing both the safeguard of
security together with the extraordinary flexibility and adaptability required to operate in the digital era.
Accolade is a repository for the most restricted data of some of the largest global companies, as well as
organizations that must comply with extremely strict security standards for government-related data and
projects. As such, we have continually enhanced our product, our services and our processes to support the
demands of these organizations. Based on repeated feedback from prospects in their purchasing cycle, we
believe we have a strong approach and comprehensive solution that addresses the security requirements of
these organizations and their corporate IT departments.
We have the following certifications:
- Sopheon is ISO 27001 : 2013 certified.
- Sopheon is Skyhigh CloudTrust Enterprise-Ready.
- Data centers providing hosting are at a minimum ISO 9001, ISO 27001, or SSAE 16 certified.
- Accolade is Stage-Gate Ready Certified by Stage-Gate International. The Stage-Gate Ready logo
identifies certified software solutions capable of automating new product development and new product
portfolio management processes and practices. Stage-Gate International recommends buyers look for
this "seal of approval" when evaluating innovation process automation software.
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STRATEGIC REPORT
Growth Strategy
Sopheon’s growth strategy is to enable corporations to execute on their new operational models for sustainable
innovation success in the digital era. This focus requires Sopheon to:
• Leverage blue chip references to extend Accolade as the digital platform of choice and to empower
enterprise adaptability across a global organization. Sopheon’s roster of customer
"Accolade is a
powerful platform that can
support many use cases and
corporate portfolios, which has
allowed us to extend our initial
investment for managing our new
product development into
other areas including IT project
portfolios and electronic lab
notebooks."
names is a Who’s Who of the world’s leading companies. We will continue to partner
tightly with our clients to gain insights and learnings to drive further advancement
and development in the Enterprise Innovation Management market. Sopheon
has been a specialist in new product development for some 17 years. Over the
last few years, we have seen the expanded use of Accolade beyond product
development. Indeed, an important aspect of 2017 growth was the increased
adoption of Accolade as an enterprise platform for areas outside our traditional
product innovation arena. Licenses sold last year included applications for
Accolade as diverse as capital expenditure management, intellectual property
(IP) management, IT project and portfolio management, and enterprise initiative
management. Each of these represents extension business beyond the core
product innovation process. We believe our Accolade platform extension strategy
represents a significant growth opportunity. In addition, the pace of technology
Jason Eckert,
SVP of Global Research,
Development & Quality, Leprino Foods
disruption in today’s market requires companies to be able to make strategic
and often transformational pivots with speed. We call this capability “enterprise
adaptability.” Our clients are increasingly using Accolade as the platform
to enable these shifts and we believe this trend will continue. We therefore
anticipate further enterprise adaptability expansion in 2018.
• Generate faster growth in target industries through deeper specialization and domain-specific expertise.
We have always believed that different vertical markets, while sharing core functionality needs, have specific pain
points and best-practice needs. In 2017 we continued our objective to dominate in our chosen core verticals of
chemicals, aerospace, consumer products, food and beverage, and high technology. Sopheon’s long history and
experience in these verticals allows us to operate as an industry connector for our clients, introducing them to
one another to jointly learn and advance their competency and success. We will continue to invest in industry-
specific expertise and solutions. Last year we indicated that we were beginning to explore the insurance and
auto verticals. We continue to assess the opportunities in the broader financial services, auto and the apparel
markets. We have not yet put solid investment behind these areas and they remain under consideration.
• Multiply our growth through developing and monetizing an Accolade ecosystem of distribution
partnerships – channel, strategic and geographical. We feel Accolade and our ecosystem have now matured
to where it makes sense to invest time in the development of a network of partner relationships to expand the
growth rate of the business. Partner development will come in several shapes, including expanded distribution
beyond our geographic reach with our own direct team; consulting partners operating in the Enterprise Innovation
Management space who can both introduce and leverage our solution; and strategic partners who have created
great innovation intellectual property (IP) and are looking for a platform to take it to the broader markets.
Performance and momentum suggest we are on the correct path, giving us confidence in our growth strategy as we
go forward.
A summary of the principal risks areas facing the business is set out in the Directors' Report.
Approved by the board on 21 March 2018 and signed on its behalf by:
Andy Michuda
CEO
3 Richard Foster, Yale School of Management
4 Sopheon makes no claim to any formal working relationship with the companies quoted
5 http://www.pginvestor.com/Company-Strategy/Index?KeyGenPage=208821
6 http://www.conagrabrands.com/our-company/overview
7 https://www.greenbiz.com/article/conversation-pepsico-chairman-and-ceo-indra-nooyi-how-do-you-promote-transformation
8 https://www.prophet.com/thinking/2015/08/243-general-mills-gains-relevance-through-products-and-acquisition/
9 https://www.ge.com/digital/blog/digital-industrial-transformation
STRATEGIC REPORT
13
F I N A N C I A L R E V I E W
In this review, our CFO Arif Karimjee provides further analysis of Sopheon’s financial results
during 2017, our financial position at the end of the year, and an overview of key corporate
developments.
Trading Performance
Sopheon’s consolidated turnover in 2017 was $28.5m, a 23 percent increase over $23.2m
in 2016. Almost half of the rise can be attributed to a strong license performance, with both volume and value
factors playing a role. Total license transactions including extension orders were 59 in 2017, compared to 49 the
year before – but just as importantly, the average revenue recognized per license transaction increased to over
$158,000 (2016: $138,000), helped by two very substantial orders signed in the final weeks of the year. One of
these was signed in the United States, and the other in Germany. Overall, the increase in license revenues was 37
percent. Maintenance and hosting revenues were up almost 21 percent, and services by almost 13 percent. As in
2016, the impact of the currency changes on revenue was relatively muted in 2017 and if the prior year exchange
rates had been in effect, 2017 revenues would have been just $0.2m lower. Overall, in 2017 our business
delivered a 33:36:31 ratio of licenses, maintenance and hosting, and services respectively compared to 29:37:34
in the previous year. This marks a further year of advancing license revenue as a cornerstone of our business
model, driven by both volume and size of deals as noted above.
As noted elsewhere in this report, the strong finish to the year contributed to an encouragingly high revenue
visibility for 2018. Moreover, the large German order referred to above topped off a strong year for our European
business, resulting in the overall proportion of revenues from customers in Europe increasing sharply to almost 39
percent (2016: 29 percent) of total. The majority of the remainder is from customers in North America, with a small
but important foothold in Asia, Australia and the Middle East.
A regular feature of our business is a very strong fourth quarter and 2017 was no exception, with over a third of
the year’s revenue recognized in that quarter. This is sometimes accompanied by a strong second quarter and
a quiet third quarter. Overall, in 2017 the second half of the year accounted for 55 percent of revenues (2016:
51 percent and 2015: 60 percent). Over the years, we have frequently referred to the sensitivity of our results
to individual license sales and while this effect is reducing as we grow the business, it does remain a feature.
Although it does not show the same level of fluctuation, our services business does also show seasonality and last
year the second and final quarters were particularly busy, in line with the demands of the volume and individual
scale of implementation projects. Other revenue elements are more evenly spread as would be expected from
their accounting treatment.
The group’s base of recurring business rose above $12m coming into 2018, compared to $9.9m at the start of last
year. This comprises maintenance, hosting and cloud services, and some Software as a Service (SaaS) contracts.
The vast majority of our license revenue continues to remain perpetual in nature, but we are seeing growing
interest in SaaS options. During 2017 we signed three SaaS deals, still representing a relatively modest part of
our business but showing more traction. We are also seeing further take-up of our hosting service from new and
existing perpetual customers, and we continue to extend the scope of our security certifications to ensure this
service remains an attractive proposition. Approximately 25 percent of our active perpetual customers are hosted
by Sopheon. Retention of recurring revenue increased to 95 percent by value following two years at 94 percent.
This is a key metric for Sopheon, as we believe that building recurring revenue is fundamental to our long-term
growth. In this regard we continue to invest in customer satisfaction programs alongside regular service and
account management processes to maximize value for our customers.
Reflecting the greater license proportion, gross margin is over 73 percent, ahead of the 70 percent achieved last
year, which had greater services intensity. Costs of the professional services organization are included in costs
of sales, alongside the costs of our hosting activities and some license royalties for OEM partners. We recruited
a number of new consultants in 2016 who contributed to our performance last year, and avoided the need to
use product development resources on projects as we had the year before. We believe that a strong services
capability is also key to long-term success and win-rate, and we have continued to recruit in this area through
2017 and will continue to do so.
Coming into 2018 and following some early sales bookings at the start of the year, revenue visibility for the year
already stands at $19.3m compared to $14.5m a year ago, giving reason for confidence and optimism for the year
ahead.
14
STRATEGIC REPORT
Research and Development Expenditure
Overall expenditure in product development increased by approximately $0.8m to $4.6m in 2017; however, the 2016
amount is after recognizing $0.4m of costs as services cost of sales, as we used product development resources
to assist with peaks of service demand that arose during that year. As a result, the actual cost of the product teams
rose by $0.4m overall. These amounts can be compared to the headline research and development reported in the
income statement showing an increase from $3.9m to $4.3m; the differences are due to the effects of capitalization
and amortization of development costs. The additional spend reflects the recruitment of additional development
resources during the year including design, architecture and coding expertise and this has resulted in a greater level
of investment in line with Sopheon’s product roadmap as described elsewhere in this report. This investment is in
turn reflected in a higher capitalization rate; the amount of 2017 research and development expenditure that met the
criteria of IAS38 for capitalization was $2.5m (2016: $1.9m) offset by amortization charges of $2.2m (2016: $2.0m).
These capitalized costs are largely attributable to the group’s investment in the Accolade 11.1, 11.2, 11.3 and 12.0
releases.
Other Operating Costs
As a knowledge intensive business, three quarters of Sopheon’s costs are payroll and related. Sopheon has a
relatively mature and highly qualified blend of staff, reflecting the professional and intellectual demands of our chosen
market. For several years through 2016, Sopheon held staffing between 100-115 depending on requirements and
natural movement of people in and out of the business. Our focus remains on securing the right mix of people rather
than targeting a headcount number; however, as revenue growth has progressed in the last 18 months we have
sought to accelerate the acquisition of additional resources. Consequently we ended 2017 with 132 staff compared to
100 two years before. Our insistence on quality though means that we remain somewhat behind plan in this area and
continue to target a large number of recruits into 2018 to support the growth trajectory of the business. Although not
as visible as the impact of revenue outperformance, slower than expected hiring also contributed to the exceptional
profitability in 2017.
The average headcount during 2017 was 125, compared to 110 the year before, leading to higher overall wage costs
as reported in Note 7 of the financial statements. Payroll costs in the last three years have also included the cost
of our corporate bonus scheme, for which all non-sales staff in the company are eligible. The bonus is linked to the
achievement of our annual EBITDA goals. This has contributed to a higher payables balance at each year-end, since
the bonuses are not paid until the following year. Bonus costs in a given year are allocated to the relevant categories
of the income statement based on employee department.
Specific comments regarding service operations and research and development costs are noted above. Overall
costs in the sales and marketing area increased by approximately $1.2m. Roughly half of this was attributable to
an increase in resources and marketing expenditures, and the remainder was due to the strong sales performance
leading to higher commissions and incentive payments. As with other areas, we are looking to expand this team
during 2018.
Headline administration costs have risen by approximately $0.8m, of which roughly $0.3m is due to 2016 exchange
gains captured following the UK’s referendum decision to leave the European Union. The remaining $0.5m includes
additional resources in finance, IT and human resources to keep pace with our growth and also the impact of the
notional charge for share option grants, which is allocated entirely to this caption and has increased with the rising
share price. With regard to foreign exchange, excluding the impact of one-off events such as the UK referendum,
the group aims to incorporate a natural hedge through broadly matching revenues and costs within common
currency entities, reducing the need for active currency management. In addition, it is not the group’s policy to hedge
currency cash holdings, but we do look to keep cash balances in local currency within an entity and to time currency
purchases so as to minimize impacts on the individual income statements.
Results
In common with other technology businesses, Sopheon reports EBITDA (Earnings before Interest, Tax, Depreciation
and Amortization) as a key indicator of the underlying performance of our business. EBITDA is further defined and
reconciled to profit before tax in Note 4. The combined effect of the revenue and cost performance discussed above
has resulted in Sopheon’s EBITDA performance for 2017 rising very strongly, for the third year in succession, to
$8.0m, from $5.6m in 2016. As stated elsewhere in this report, we view the 2017 profit performance as exceptional
as it combines an unprecedented revenue outperformance with lower than planned costs.
STRATEGIC REPORT
15
As further described below, during the year the group had facilities with Silicon Valley Bank and also benefited from
convertible unsecured loan stock, which was converted into equity in December 2017. This transaction included
a compensatory payment of interest resulting in a higher than usual total interest charge of $0.5m (2016: $0.3m).
Including the effect of interest, depreciation and amortization, the group reported a profit before tax for the year of
$5.1m (2016: $3.0m).
Although Sopheon benefits from accumulated tax losses in a number of jurisdictions this is not universal and
accordingly a current tax charge of approximately $0.4m was incurred in 2017 (2016: $0.1m) of which roughly $0.3m
arose in Germany and the balance in the United States. In 2016, due to the rising profit trend of the group, we
started recognition of the substantial deferred tax asset owned by the business as further detailed in Note 10, and
we have extended the scope of that recognition in 2017. Although US corporate tax rates have fallen following the
reforms adopted by the US Congress, the overall effect of our policy has resulted in recognition of a further $0.7m
(2016: $1.3m) in the current year, of a total potential asset of $13.0m. Altogether this leads to a profit after tax of
$5.4m (2015: $4.3m). Profit per ordinary share has also risen to 72 cents (2016: 59 cents).
Dividend
Following the success of the last several years the board has decided to adopt a progressive dividend policy, and
proposes a maiden dividend of 2.5 pence per share for the year ended 31 December 2017. Subject to approval by
the company’s shareholders at the annual general meeting scheduled for 7 June 2018, the dividend will be paid on
6 July 2018 with a record date of 8 June 2018.
Facilities and Assets
Several years ago the group established bank facilities with the London branch of Silicon Valley Bank, comprising
a term loan of $0.5m and a $3m revolving line of credit, and these currently extend through January 2019. Both
facilities bear interest at rates of 2.75 percent over the Wall Street Prime rate, resulting in a current effective rate
of 7.25 percent. The facilities are subject to covenants based on working capital ratios. The drawdown mechanics
and interest rates are also subject to working capital ratios. Although there is no immediate requirement for these
facilities, we view our developing relationship with Silicon Valley Bank as an important one for the future.
In 2009 and 2011, the company issued a total of £2m of convertible unsecured loan stock (“Loan Stock”) to a group
of investors including members of the board and senior management team. The Loan Stock had been due to mature
on 31 January 2019, carried an interest coupon at a rate of 8 percent per annum, and had a conversion price of
76.5p per ordinary share. At the end of 2017 the remaining holders of the Loan Stock agreed to reconstitute the
instrument such that it would automatically convert to equity on 22 December 2017, at the conversion price stated
above, resulting in the issue of approximately 2.5m new Ordinary Shares. This change improved the profile of the
group’s year-end balance sheet and simplified the capital structure, as well as eliminating the interest charge going
forward. In conjunction with this amendment, a one-off interest payment of approximately $0.2m was made to holders
of the Loan Stock in recognition of the loss of their interest and repayment rights as a result of the early conversion.
Intangible assets stood at $5.8m (2016: $5.5m) at the end of the year. This includes (i) $4.8m being the net book
value of capitalized research and development (2016: $4.5m) and (ii) an additional $1.0m (2016: $1.0m) being
goodwill arising on acquisitions completed in previous years. As shown above in our discussion of research and
development costs, capitalization and amortization have been broadly in balance for a number of years. Our spend
on tangible fixed assets is increasing in line with staffing and revenues, and this resulted in net book value rising to
$0.4m at the end of the year (2016: $0.2m).
Consolidated net assets at the end of the year stood at $18.6m (2016: $10.4m), an increase of $8.2m. Over half of
this increase is attributable to an improvement in the net current asset position, on the back of another year of strong
operational performance. A further $2.6m relates to the conversion of the Loan Stock, and $0.7m to the increased
recognition of the deferred tax asset, with the remaining $0.5m due to the increase in tangible and intangible fixed
assets. Within the net current asset position, gross cash resources at 31 December 2017 amounted to $12.7m
(2016: $10m). Approximately $8.2m was held in US Dollars, $4.0m in Euros and $0.5m in Sterling. Net cash, stated
after subtracting debt, rose from $4.2m the previous year to $9.5m at the end of 2017.
Approved by the board on 21 March 2018 and signed on its behalf by:
Arif Karimjee
CFO
16
GOVERNANCE
D I R E C T O R S A N D A D V I S O R S
Directors
Barry K. Mence
Andrew L. Michuda
Arif Karimjee ACA
Stuart A. Silcock FCA
Daniel Metzger
Executive Chairman
Chief Executive Officer
Finance Director
Non-executive Director
Non-executive Director
Please refer to the inside back cover of this report for details of the
professional background of each director.
Secretary
Arif Karimjee
Registered Office
Registered Name and Number
Dorna House One
50 Guildford Road
West End, Surrey GU24 9PW
Sopheon plc
Registered in England and Wales
No. 3217859
Auditors
Principal Bankers and Financiers
Solicitors and Attorneys
AIM Nominated Adviser and Broker
Registrars
BDO LLP
55 Baker Street
London W1U 7EU
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
United States
Rabobank Amsterdam
Van Baerlestraat 102-106
1071 BC Amsterdam
The Netherlands
Squire Patton Boggs
7 Devonshire Square
Cutlers Gardens
London EC2M 4YH
Loyens & Loeff
Fred Roeskestraat 100
1076 ED Amsterdam
The Netherlands
finnCap Limited
60 New Broad Street
London EC2M 1JJ
Link Asset Services
65 Gresham Street
London EC2V 7NQ
Silicon Valley Bank
Alphabeta
14-18 Finsbury Square
London EC2A 1BR
Commerzbank
Rheinstrasse 14
64283 Darmstadt
Germany
Briggs and Morgan
2200 IDS Center, 80 South 8th Street
Minneapolis, MN 55402
United States
GOVERNANCE
17
R E P O R T O N D I R E C T O R S ’ R E M U N E R A T I O N
The remuneration committee of Sopheon plc is responsible for oversight of the contract terms, remuneration and
other benefits for executive directors, including performance-related bonus schemes. The committee comprises
two non-executive directors, D. Metzger and S.A. Silcock, together with B.K. Mence, other than in respect of his
own remuneration. The committee makes recommendations to the board, within agreed parameters, on an overall
remuneration package for executive directors and other senior executives in order to attract, retain and motivate high
quality individuals capable of achieving the group’s objectives. The package for each director consists of a basic salary,
benefits and pension contributions, together with performance-related bonuses and share options on a case-by-case
basis. Consideration is given to pay and employment policies elsewhere in the group, especially when considering
annual salary increases. From time to time, the remuneration committee may take advice from appropriate remuneration
consultants, or consult benchmarking data.
Contracts
The service contract between the company and Mr. Michuda is terminable on up to three months’ notice, with an
additional twelve months’ salary in lieu of notice due by the company in the event of termination without cause. Service
contracts between the company and the other executive directors are terminable on six to nine months’ notice.
Fees for Non-executive Directors
The fees for non-executive directors are determined by the board. The non-executive directors are not involved in any
discussions or decisions about their own remuneration.
Directors’ Remuneration
Set out below is a summary of the fees and emoluments received by all directors during the year, translated where
applicable into US Dollars at the average rate for the period. Benefits primarily comprise healthcare insurance and similar
expenses. Details of directors’ interests in shares and options are set out in the Directors’ Report.
Executive Directors
B.K. Mence
A.L. Michuda
A. Karimjee
Non-executive Directors
S.A. Silcock
D. Metzger
Pay and Fees
2017
$
Bonus
2017
$
Benefits
2017
$
Total
2017
$
Total
2016
$
195,335
311,500
173,591
91,446
150,500
65,323
9,811
9,703
4,388
296,592
471,703
243,302
302,803
457,271
236,051
30,458
30,458
_______
741,342
_______
_______
-
-
_______
307,269
_______
_______
-
-
_______
23,902
_______
_______
30,458
30,458
_______
1,072,513
_______
_______
29,839
29,839
_______
1,055,803
_______
_______
The remuneration committee establishes the objectives that must be met for each financial year if a cash bonus is to be
paid. With the principal exception of members of Sopheon’s sales teams, for whom incentives are tied to individual or
territory results, the committee concluded that the cash incentive should be tied to the financial performance of the group
as a whole, and in 2016 and 2017 these objectives were set with regard to EBITDA performance. These measures were
applied to all members of the executive board and management committee of the group, as well as the majority of the
group’s employees.
In addition to the amounts disclosed above, pension contributions are made to individual directors’ personal pension
schemes. During 2017 contributions of $9,073, $7,956 and $8,058 (2016: $8,138, $5,935 and $8,436) were paid
respectively to the pension schemes of B.K. Mence, A.L. Michuda and A. Karimjee.
18
GOVERNANCE
Performance Graph
The following graph shows the company’s share price performance on AIM since January 2012, in UK pence, compared
with the performance of the FTSE AIM All Share index, which has been selected for this comparison as it is a broad-
based index which the directors believe most closely reflects the performance of companies with similar characteristics
as the group’s. Historical share prices have been adjusted to reflect the net 20:1 share consolidation performed by the
group during 2013.
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0
Sopheon Share Price
AIM All-Share Rebase
01/01/2013
01/01/2014
01/01/2015
01/01/2016
01/01/2017
01/01/2018
Directors’ Interests
The interests of the directors, who held office at the end of the year, in the share capital of the company were as follows:
Share Options
Ordinary Shares
8%
Convertible
Loan Stock
At 31 December
2017
2016
2017
2016
2017
2016
B.K. Mence
A.L. Michuda
A. Karimjee
S.A. Silcock
D. Metzger
24,250
240,000
75,000
-
-
24,250
215,000
63,350
-
-
2,294,927
88,823
85,294
541,064
5,000
1,447,576
30,000
50,000
274,627
5,000
-
-
-
-
-
£640,000
£45,000
£27,000
£200,000
-
With respect to the interests stated above for B.K. Mence, S.A Silcock and A. Karimjee, their respective spouses are the
beneficial owners of 17,250, 10,375 and 35,294 ordinary shares each. Accordingly, B.K. Mence’s personal interest is in
2,277,677, S.A. Silcock in 530,689 and A. Karimjee in 50,000 ordinary shares.
GOVERNANCE
19
The following table provides information for each of the directors who held office during the year and held options to
subscribe for Sopheon ordinary shares. All options were granted without monetary consideration.
Date of
Grant
Exercise
Price
At 31
December
2016
Granted
During
Year
Expired
During
Year
At 31
December
2017
B.K. Mence
B.K. Mence
A.L. Michuda
A.L. Michuda
A.L. Michuda
A.L. Michuda
A.L. Michuda
A. Karimjee
A. Karimjee
A. Karimjee
A. Karimjee
A. Karimjee
29 September 2012
5 December 2013
27 August 2010
29 September 2012
5 December 2013
8 April 2016
15 February 2017
27 August 2010
29 September 2012
5 December 2013
8 April 2016
15 February 2017
105p
85p
6,125
18,125
12,500
150p
105p
85p
87.5p
467.5p
138,380
49,000
15,120
-
150p 7,500
23,125
105p
26,875
85p
5,850
87.5p
-
467.5p
-
-
-
-
-
-
25,000
-
-
-
-
11,650
6,125
-
18,125
-
- 12,500
138,380
-
49,000
-
15,120
-
25,000
-
7,500
-
23,125
-
26,875
-
5,850
-
11,650
-
None of the directors exercised any share options during the year. Vesting of all of the above share options which were
outstanding at 31 December 2017 is in three equal tranches on the first, second and third anniversaries of the date of
grant and all such options expire on the tenth anniversary of the date of grant. The mid-market price of Sopheon ordinary
shares at 31 December 2017 was 360p. During the financial year the mid-market price of Sopheon ordinary shares
ranged from 324p to 500p. Save as disclosed above, no director (or member of his family) or connected persons has any
interest, beneficial or non-beneficial, in the share capital of the company.
Approved by the board on 21 March 2018 and signed on its behalf by:
Arif Karimjee
Director
20
GOVERNANCE
D I R E C T O R S ’ R E P O R T
The group’s principal activities during the year continued to focus on the provision of software and services for complete
Enterprise Innovation Management solutions. The Chairman’s Statement on page 6 includes reference to the group’s future
prospects. In view of the fact that two-thirds of the group’s revenues and staff are based in the USA, the group’s financial
statements are presented in US Dollars. The board is pleased to recommend a final dividend in respect of the year ended
31 December 2017 of 2.5 pence per share, amounting to £250,000.
Directors
The directors who served during the year are disclosed in the Report on Directors' Remuneration.
Corporate Governance
The Sopheon board is committed to high standards of corporate governance and aims to follow appropriate governance
practice, although as a company listed on AIM the company is not subject to the requirements of the UK Corporate
Governance Code. The board currently comprises three executive directors and two independent non-executive directors.
Their biographies appear at the back of this annual report, and demonstrate a range of experience and caliber to bring the
right level of independent judgment to the board.
The board is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system can only
provide reasonable, but not absolute, assurance against material misstatement or loss. The board believes that the group has
internal control systems in place appropriate to the size and nature of its business. The board is satisfied that the scale of the
group’s activities do not warrant the establishment of an internal audit function. The board is also responsible for identifying
the major business risks faced by the group and for determining the appropriate course of action to manage those risks.
Formal meetings are held quarterly to review strategy, management and performance of the group, with additional meetings
between those dates convened as necessary. During 2017, all directors attended all quarterly meetings either in person or
by conference call. The audit committee, which comprises all of the non-executive directors and is chaired by Stuart Silcock,
considers and determines actions in respect of any control or financial reporting issues they have identified or that are raised
by the auditors. The board has a formal schedule of matters specifically reserved to it for decision. Details of the constitution
of the remuneration committee are provided in the Report on Directors’ Remuneration on page 17.
Post Balance Sheet Events
There are no post balance sheet events that warrant disclosure in the financial statements.
Research and Development
A summary of research and development activities and the key benefits and enhancements to the Sopheon Accolade solution
is set out in the Strategic Report. A summary of the expenditure incurred and the accounting treatment thereof is set out in
the Financial Report.
Principal Risk Areas
As with any business at its stage of development, Sopheon faces a number of risks and uncertainties. The board monitors
these risks on a regular basis. The key areas of risk identified by the board are summarized below.
Sopheon’s markets are emerging and this means that Sopheon's growth may be erratic. The broad market for Sopheon’s
software products continues to emerge and evolve, and the timing and size of individual sales can have a substantial impact
on performance in a given period. Sopheon has formalized processes for soliciting input to product strategy from analysts and
customers, while also capitalizing on the group’s leadership in key market areas. Sopheon also seeks to improve revenue
predictability by introducing specific initiatives to balance efforts between new customer acquisition, and meeting the needs of
existing customers. Sopheon’s consistently growing recurring revenue base should also improve revenue predictability.
Sopheon’s prospects for achieving sustained and growing profitability are dependent on correctly aligning investments with
sales. Sopheon’s ability to continue to finance its investments at the optimal pace is dependent on the group maintaining
profitability and sales growth alongside its investment strategy, or having appropriate financial resources in place to invest
with confidence. Sopheon has sought to focus its resources on the sub-segments that it believes offer the best opportunities
for growth. Sopheon management carefully monitors short- and medium-term financing requirements and has regularly raised
additional funding resources to meet requirements.
GOVERNANCE
21
Some of Sopheon’s competitors and potential competitors have greater resources than Sopheon. Sopheon remains a
relatively small organization by global standards. Its resources are small compared to those of many larger companies
that are capable of developing competitive solutions and it can be difficult to overcome the marketing engine of a large
global firm. Sopheon seeks to compete effectively with such companies by keeping its market communications focused,
clear and consistent with its product and market strategy, and working to deliver first class quality of execution so that
referenceability of the customer base is maximized. Sopheon’s use of an agile development methodology with deep
customer involvement is a key plank in this approach.
Sopheon is dependent upon skilled personnel, the loss of whom could have a material impact. While service agreements
have been entered into with key executives, retention of key members of staff cannot be guaranteed and departure of
such employees could be damaging in the short term. In addition, the competition for qualified employees continues to be
difficult and retaining key employees has remained challenging. As a relatively small business, Sopheon is more exposed
to this risk than some of its larger competitors. Sopheon management checks staff remuneration against recognized
benchmarks and other industry sources, and seeks to maintain pay at competitive levels appropriate to its business.
Sopheon will require relationships with partners who are able to market and implement its products. Historically, Sopheon
has devoted substantial resources to the direct marketing of its products, and its strategy to enter into strategic alliances
and other collaborative relationships to widen the customer base and create a broad sales and implementation channel
for its products is not yet mature. The successful implementation of this strategy is crucial to Sopheon’s prospects and
its ability to scale effectively. However, Sopheon cannot be sure that it will select the right partners, or that the partners it
does select will devote adequate resources to promoting, selling and becoming familiar with Sopheon's products. Over the
years, Sopheon has built up a network of both resellers and consulting partners, however this has yet to mature and the
revenues delivered through these relationships remain a relatively modest part of the total.
Sopheon could be subject to claims for damages in connection with its products and services. Sopheon may be exposed
to claims for damages from customers in the event that there are errors in its software products, should support and
maintenance service level agreements fail to meet agreed criteria, or should the security features of its software or hosting
services fail. Sopheon has sought to protect itself from such risks through excellent development methodologies and high
quality operating procedures, its contract terms and insurance policies. Sopheon has never had any such claims.
Auditors
All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any
information needed by the company’s auditors for the purposes of their audit and to ensure that the auditors are aware
of that information. The directors are not aware of any relevant audit information of which the auditors are unaware. A
resolution to reappoint BDO LLP as auditors will be put to the members at the Annual General Meeting.
Financial Instruments
Details of the group’s financial instruments and its policies with regard to financial risk management are given in Note 22
to the financial statements.
Substantial Shareholdings
The directors are aware of the following persons who as at 21 March 2018 were interested directly or indirectly in
3 percent or more of the company’s issued ordinary shares:
Name
Rivomore Limited and Myrtledare Corp.
B.K. Mence (director)
S.A. Silcock (director)
No. of
% Issued
Ordinary Shares Ordinary Shares
2,495,101
2,294,927
541,064
24.9
22.9
5.4
S.A. Silcock’s and B.K. Mence’s interests represent direct beneficial holdings as well as those of their families.
Approved by the board on 21 March 2018 and signed on its behalf by:
A. Karimjee
Director
22
GOVERNANCE
S T A T E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S I N
R E S P E C 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
The directors are responsible for preparing the annual report and financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors
have elected to prepare the group and company financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve
the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group
and company and of the profit or loss of the group for that period. The directors are also required to prepare financial
statements in accordance with the rules of the London Stock Exchange for companies trading securities on the
Alternative Investment Market.
In preparing these financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to
any material departures disclosed and explained in the financial statements; and
• 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 comply with the requirements of 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.
Website Publication
The directors are responsible for ensuring the annual report is made available on a website. Annual reports are
published on the company's website in accordance with legislation in the United Kingdom governing the preparation
and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and
integrity of the company's website is the responsibility of the directors. The directors' responsibility also extends to the
ongoing integrity of the annual reports contained therein.
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
23
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
S O P H E O N P L C
Opinion
We have audited the financial statements of Sopheon plc (the ‘parent company’) and its subsidiaries (the ‘group’) for
the year ended 31 December 2017 which comprise the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated and company statements of changes in equity, the consolidated and company
statements of financial position, the consolidated and company cash flow statements and notes to the financial
statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law
and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent
company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as
at 31 December 2017 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by
the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the
financial statements section of our report. We are independent of the group 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 the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions Relating to Going Concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to
you where:
• the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not
appropriate; or
• the directors have not disclosed in the financial statements any identified material uncertainties that may cast
significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of
accounting for a period of at least twelve months from the date when the financial statements are authorized for
issue.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
24
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Risk
Our Response
Revenue Recognition
See accounting policy in Note 2 on page 33.
The group, as a software business, generates
revenue primarily from the sale of licenses,
related maintenance/support contracts and service
income.
We considered there to be a significant audit risk
arising from inappropriate or incorrect recognition
of revenue.
The risk of material misstatement in relation to
revenue recognition concerns the recognition
around the year-end, particularly in relation to
license sales. License sales require codes to be
provided to the customer, which enables access to
the Accolade software. There is also a risk that all
revenue streams have not been recognized in line
with the revenue recognition policy of Sopheon,
as detailed within Note 2 of these financial
statements, and that the policy itself is not in
accordance with International Financial Reporting
Standards (‘IFRS') as adopted by the European
Union.
Revenue recognition is one of the primary focuses
of the engagement team. During the planning
phase, discussions are held in relation to the
revenue approach, and the senior members of the
audit team are responsible for the procedures that
are performed around revenue. Due to this focus,
revenue recognition is considered to be a key audit
matter.
In order to assess the appropriateness of the
processes and controls in place that impact upon
revenue recognition, we performed walkthroughs.
These walkthroughs involved understanding the
design, implementation and operating effectiveness
of the controls over the group’s revenue cycle.
Our audit procedures included assessing the
appropriateness of the revenue recognition policy,
in line with IFRS as adopted by the European
Union, with particular given to IAS 18.
For each of the three revenue streams, licenses,
maintenance and service revenues, we selected a
sample of key contracts for testing. We assessed
whether the revenue recognized was in line
with the contractual terms, the group’s revenue
recognition policy and the relevant accounting
standards.
To address the risk of cut-off in relation to
license contract revenue recognized in the year,
we obtained support for the fact that binding
contracts were entered into before the year-end,
and therefore were recognized in the appropriate
period.
For the maintenance and service contracts that
we selected, we ensured the methodology applied
in accounting for accrued and deferred revenue
on these contracts was in line with the contractual
terms and stage of completion of the project,
where appropriate.
Finally, we ensured that of the small, yet growing
number of SaaS contracts supplied by the group,
a sample of contracts were obtained, and the
revenue recognition in relation to these contracts
was confirmed as appropriate.
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
25
Risk
Our Response
Capitalized Development Costs
See accounting policy in Note 2 and intangible
assets Note 14 on pages 33 and 45 respectively.
The group capitalizes costs in relation to the
development of the software provided to its clients,
being the Accolade platform.
In accordance with IAS 38, management’s policy is
to capitalize development expenditure on internally
developed software products if the costs can be
measured reliably and the resulting asset meets
the following criteria:
• It is technically feasible to develop the product
• Adequate resources are available to complete
the development
• There is an intention and ability to complete
and sell the product
• It is controlled by the group
• Future economic benefits are expected to flow
to the group
• It is identifiable
We considered whether the development costs
capitalized met the criteria for capitalisation under
IAS 38 and subsequently whether the mechanics
over capturing time spent and translating that cost
into an accounting entry operated accurately.
Any capitalized projects with a material net book
value (“NBV”) on the balance sheet were selected
for substantive testing. An understanding was
gained over the stage of development of the
product and the ability for the asset to generate
future economic benefits for the business.
For each intangible asset sampled all inputs were
agreed back to supporting documentation ensuring
the existence and valuation of the intangible asset
created.
As an extension of the above, we revisited
management’s estimate of the amortization period
applied to the asset, establishing whether any
requirements of impairment exist in relation to
older versions of Accolade.
Development costs not satisfying the above criteria
and expenditure on the research phase of internal
projects are recognized in the income statement as
incurred.
Finally, in line with IAS 36 we ensured that
assets that were not yet available for use (such
as projects in development) had undertaken an
impairment review as required.
Capitalized development costs are amortized
over the period within which the group expects to
benefit from selling the product developed. This is
deemed to be four years.
There is a risk that the criteria outlined under IAS
38 are not met and therefore development costs
are incorrectly capitalized.
The senior members of the audit team are
responsible for completing the work in relation to
capitalized development costs. The testing strategy
involves communications with individuals working
out of different components within the group, and
regular visits to foreign locations. Both of these
factors indicate that this is a key audit matter due
to the focus of resources and the time apportioned
to this area of the audit.
26
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Our Application of Materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of
misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions,
could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In
order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower
materiality, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these
levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements,
and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
We determined materiality for the group financial statements as a whole to be $285,000 (2016: $347,000) which
represents 1 percent of revenue (2016: 1.5% of revenue). Materiality for the parent was set at 90% of group materiality,
being $252,000. We agreed with the audit committee that we would report to them misstatements identified during our
audit above $14,000 (2016: $17,350).
We used revenue as a benchmark as this is the primary KPI which is used to address the performance of the business
by the board, and is consistently referenced within the RNS announcements released by the group, in addition to new
contract wins, both of which feed in to the revenue figure.
An Overview of the Scope of Our Audit
Our group audit was scoped by obtaining an understanding of the group and its environment and assessing the risks
of material misstatement at the group level. The group consists of seven entities based in Europe and North America.
There are two entities based in the UK, one being the holding company. Further to this there are two trading entities
incorporated in Europe based in Germany and Holland, with the remaining three trading entities incorporated in the USA.
Based on our assessment of the group and consistent with the prior year, we focused our group audit scope primarily
over the significant components, being Sopheon plc, Sopheon UK Limited, Sopheon GmbH and Sopheon Corporation,
Minnesota. For these significant components we completed detailed audit testing, and performed desktop reviews for the
remaining group entities.
At the parent entity level we also tested the consolidation process including consolidation adjustments and journals,
performed our work on all key judgements areas and carried out analytical procedures to confirm our conclusion
that there were no significant risks of material misstatement of the aggregated financial information of the remaining
components not subject to audit.
The graphs below demonstrate the coverage of our audit work over the components within the group. Revenue has been
tested in detail across each entity within the group, regardless of the level of review performed in relation to that entity.
The full scope audit work performed has therefore provided coverage over 100 percent of the group from a revenue
perspective, and also covers 91 percent of the total assets of the group. The elements of the group that were not covered
by full scope work were reviewed to group materiality.
Revenue
100%
9%
Total assets
91%
Full audit scope
Review at group level
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
27
Other Information
The directors are responsible for the other information. The other information comprises the information included in
the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial
statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact. We have nothing to
report in this regard.
Opinions on Other Matters Prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on Which We are Required to Report by Exception
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.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to
report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the directors’ responsibilities statement set out on page 22, the directors are responsible
for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the directors determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease
operations, or have no realistic alternative but to do so.
28
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Auditor’s Responsibilities for the Audit of the Financial Statements
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
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.
Iain Henderson (senior statutory auditor)
For and on behalf of BDO LLP, statutory auditor
55 Baker Street
London W1U 7EU
United Kingdom
21 March 2018
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
FINANCIAL INFORMATION
29
C O N S O L I D A T E D I N C O M E S T A T E M E N T
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 7
Revenue
Cost of sales
Gross profit
Sales and marketing expense
Research and development expense
Administrative expense
Operating profit
Finance income
Finance expense
Profit before tax
Income tax credit
Profit for the year
Earnings per share
Basic (US cents)
Fully diluted (US cents)
Notes
2017
$’000
2016
$’000
3
28,534
(7,591)
_______
23,203
(6,872)
_______
20,943
16,331
(7,730)
(4,266)
(3,350)
(6,565)
(3,881)
(2,562)
_______
_______
5,597
3,323
8
9
6
(468)
_______
1
(290)
_______
5,135
3,034
10
243
_______
1,275
_______
5
5,378
_______
_______
4,309
_______
_______
12
12
71.92c
_______
_______
59.05c
_______
_______
55.92c
_______
_______
44.35c
_______
_______
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
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 7
Profit for the year
Other comprehensive expense
Exchange differences on translation of foreign operations
Total comprehensive income for the year
2017
$’000
2016
$’000
5,378
4,309
31
_______
336
_______
5,409
_______
_______
4,645
_______
_______
30
FINANCIAL INFORMATION
C O N S O L I D A T E D A N D C O M P A N Y B A L A N C E S H E E T S A T
3 1 D E C E M B E R 2 0 1 7
Group
Company
Notes
2017
$’000
2016
$’000
2017
$’000
2016
$’000
Assets
Non-current Assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Deferred tax asset
Other receivables
Total non-current assets
Current Assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Current Liabilities
Trade and other payables
Borrowings
Deferred revenue
Total current liabilities
Non-current Liabilities
Borrowings
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Capital reserves
Translation reserve
Retained profits/(losses)
Total equity
13
14
15
10
16
417
5,821
-
2,010
19
––––––––
8,267
––––––––
241
5,469
-
1,338
19
––––––––
7,067
––––––––
-
-
8,268
-
4,664
––––––––
12,932
––––––––
17
18
15,387
12,729
––––––––
28,116
––––––––
36,383
9,696
10,061
––––––––
19,757
––––––––
26,824
96
1,492
––––––––
1,588
––––––––
14,520
19
20
6,239
3,171
8,345
––––––––
17,755
––––––––
20
28
––––––––
28
––––––––
17,783
––––––––
18,600
––––––––
––––––––
4,428
3,167
6,224
––––––––
13,819
––––––––
2,648
––––––––
2,648
––––––––
16,467
––––––––
10,357
––––––––
––––––––
862
-
-
––––––––
862
––––––––
-
––––––––
-
––––––––
862
––––––––
13,658
––––––––
––––––––
-
-
7,528
-
-
––––––––
7,528
––––––––
45
1,197
––––––––
1,242
––––––––
8,770
516
-
-
––––––––
516
––––––––
2,448
––––––––
2,448
––––––––
2,964
––––––––
5,806
––––––––
––––––––
23
24
3,079
7,720
364
7,437
––––––––
18,600
––––––––
––––––––
2,375
5,843
333
1,806
––––––––
10,357
––––––––
––––––––
3,079
7,720
(1,380)
4,239
––––––––
13,658
––––––––
––––––––
2,375
5,843
(2,199)
(213)
––––––––
5,806
––––––––
––––––––
As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented
as part of these financial statements. The profit dealt with in the financial statements of the parent company for the year
ended 31 December 2017 was $4,199,000 (2016: loss of $390,000).
Approved by the board and authorized for issue on 21 March 2018.
Barry K. Mence
Director
Arif Karimjee
Director
FINANCIAL INFORMATION
31
C O N S O L I D A T E D A N D C O M P A N Y C A S H F L O W S T A T E M E N T S
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 7
Group
Company
Notes
2017
$’000
2016
$’000
2017
$’000
2016
$’000
Operating Activities
Profit/(loss) for the year
5,378
4,309
4,199
(390)
Adjustments for:
Finance income
Finance costs
Depreciation of property, plant and equipment
Amortization and impairment of intangible assets
Share-based payment expense
Deferred tax credit
8
9
13
14
Operating cash flows before movements in working capital
Intra-group credits and charges
Decrease/(increase) in provisions against intra-group loans
Increase in receivables
Increase/(decrease) in payables
Net cash generated from/(used in) operating activities
(6)
468
206
2,167
173
(672)
––––––––
7,714
-
-
(5,289)
3,241
––––––––
5,666
––––––––
(1)
290
189
2,043
62
(1,338)
––––––––
5,554
-
-
(2,208)
2,070
––––––––
5,416
––––––––
-
402
-
-
173
-
––––––––
4,774
(674)
(5,060)
(51)
136
––––––––
(875)
––––––––
-
221
-
-
62
-
––––––––
(107)
(529)
83
(22)
(20)
––––––––
(595)
––––––––
Investing Activities
Finance income
Purchases of property, plant and equipment
Development costs capitalized
Advance of loans to group companies
Repayment of loans by group companies
Net cash (used in)/generated from investing activities
8
13
14
6
(367)
(2,519)
-
-
––––––––
(2,880)
––––––––
1
(250)
(1,933)
-
-
––––––––
(2,182)
––––––––
-
-
-
(446)
1,776
––––––––
1,330
––––––––
-
-
-
(919)
955
––––––––
36
––––––––
Financing Activities
Issues of shares
(Repayment)/drawdown of borrowings
Increase in line of credit
Interest paid
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
18
34
(168)
-
(261)
––––––––
(395)
––––––––
2,391
107
177
-
(290)
––––––––
(6)
––––––––
3,228
34
-
-
(192)
––––––––
(158)
––––––––
297
107
-
-
(221)
––––––––
(114)
––––––––
(673)
10,061
277
––––––––
12,729
––––––––
––––––––
7,046
(213)
––––––––
10,061
––––––––
––––––––
1,197
(2)
––––––––
1,492
––––––––
––––––––
1,627
243
––––––––
1,197
––––––––
––––––––
32
FINANCIAL INFORMATION
C O N S O L I D A T E D A N D C O M P A N Y S T A T E M E N T S O F C H A N G E S
I N E Q U I T Y F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 7
Group
At 1 January 2016
Profit for the year
Exchange differences on translation
of foreign operations
Total comprehensive income for the year
Issues of shares
Recognition of share-based payments
Lapse or exercise of share options
At 1 January 2017
Profit for the year
Exchange differences on translation
of foreign operations
Total comprehensive income for the year
Issues of shares
Recognition of share-based payments
Acquisition of shares by Esot (Note 24)
Lapse or exercise of share options and warrants
Transfer of equity conversion reserve
At 31 December 2017
Share
Capital
$’000
Capital Translation
Reserve
$’000
Reserves
$’000
Retained
Profits/
(Losses)
$’000
2,354
-
5,751
-
(3)
-
(2,571)
4,309
-
––––––––
-
––––––––
21
-
––––––––
2,375
-
-
––––––––
-
––––––––
704
-
-
-
-
––––––––
3,079
––––––––
––––––––
-
––––––––
-
––––––––
98
62
(68)
––––––––
5,843
-
-
––––––––
-
––––––––
1,986
173
(29)
(90)
(163)
––––––––
7,720
––––––––
––––––––
336
––––––––
336
––––––––
-
-
-
––––––––
333
-
31
––––––––
31
––––––––
-
-
-
-
-
––––––––
364
––––––––
––––––––
-
––––––––
4,309
––––––––
-
-
68
––––––––
1,806
5,378
-
––––––––
5,378
––––––––
-
-
-
90
163
––––––––
7,437
––––––––
––––––––
Total
$’000
5,531
4,309
336
––––––––
4,645
––––––––
119
62
-
––––––––
10,357
5,378
31
––––––––
5,409
––––––––
2,690
173
(29)
-
-
––––––––
18,600
––––––––
––––––––
The translation reserve represents accumulated differences on the translation of assets and liabilities of foreign
operations. Full details of capital reserves are set out in Note 24.
Company
Share
Capital
$’000
Capital Translation
Reserve
$’000
Reserve
$’000
Retained
Losses
$’000
At 1 January 2016
Loss and total comprehensive loss for the year
Issues of shares
Recognition of share-based payments
Lapsing or expiry of share options
At 1 January 2017
Profit and total comprehensive income for the year
Issues of shares
Recognition of share-based payments
Acquisition of shares by Esot (Note 24)
Lapse or exercise of share options and warrants
Transfer of equity conversion reserve
At 31 December 2017
2,354
-
21
-
-
––––––––
2,375
-
704
-
-
-
-
––––––––
3,079
––––––––
––––––––
5,751
-
98
62
(68)
––––––––
5,843
-
1,986
173
(29)
(90)
(163)
––––––––
7,720
––––––––
––––––––
(994)
(1,205)
-
-
-
––––––––
(2,199)
819
-
-
-
-
-
––––––––
(1,380)
––––––––
––––––––
109
(390)
-
-
68
––––––––
(213)
4,199
-
-
-
90
163
––––––––
4,239
––––––––
––––––––
Total
$’000
7,220
(1,595)
119
62
-
––––––––
5,806
5,018
2,690
173
(29)
-
-
––––––––
13,658
––––––––
––––––––
FINANCIAL INFORMATION
33
1 . G E N E R A L I N F O R M AT I O N
Sopheon plc ("the company") is a public limited company incorporated in England and Wales. The address of its registered
office and principal place of business is set out on page 16. The principal activities of the company and its subsidiaries are
described in Note 3. The financial statements have been presented in US Dollars and rounded to the nearest thousand.
2 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
The financial statements have been prepared in accordance with International Financial Reporting Standards and
Interpretations issued by the International Accounting Standards Board as adopted by the European Union and those
parts of the Companies Act 2006 which apply to companies preparing their financial statements under IFRS. The principal
accounting policies are set out below. The policies have been applied consistently to all the years presented.
An amendment to IAS 7 Statement of Cash Flows requires an entity to provide disclosures that enable users of financial
statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes.
The group’s liabilities arising from financing activities has resulted in a reconciliation of liabilities disclosed for the first time
in Note 20. Apart from this additional disclosure, the application of this amendment has had no impact on the Group’s
consolidated financial statements. A number of new standards, amendments and interpretations to existing standards
have been adopted by the group, but have not been listed, since they have no material impact on the financial statements.
The expected impacts of IFRS 9, IFRS 15, IFRS 16 are described under relevant headings below. None of the other new
standards, amendments and interpretations in issue but not yet effective are expected to have a material effect on the
financial statements.
While the functional currency of the parent company is Sterling, the group’s financial statements have been presented in
US Dollars. The directors believe this better reflects the underlying nature of the business. Approximately two-thirds of the
group’s revenue and operating costs are denominated in US Dollars. The exchange rates used for translation of Sterling
amounts are 1.3510 US Dollars to British Pounds Sterling as at 31 December 2017, and 1.2961 US Dollars to British
Pounds Sterling as the average rate prevailing during 2017.
Going Concern
The financial statements have been prepared on a going concern basis. In reaching their assessment, the directors have
considered a period extending at least 12 months from the date of approval of these financial statements. This assessment
has included consideration of the forecast performance of the business for the foreseeable future, the cash and financing
facilities available to the group, and the repayment terms in respect of the group’s borrowings.
Basis of Preparation
The consolidated financial statements incorporate the financial statements of the parent company Sopheon plc and the
financial statements of the subsidiaries controlled by the group as defined by IFRS 10 Consolidated Financial Statements,
as shown in Note 15. Where the company has control over an investee, it is classified as a subsidiary. The company
controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns
from the investee, and the ability of the investor to use its power to affect those variable returns. The financial statements of
all the group companies are prepared using uniform accounting policies. All intra-group transactions, balances, income and
expenses are eliminated on consolidation.
Business Combinations
The acquisition of subsidiaries is accounted for within the consolidated financial statements using the purchase method.
The cost of the acquisition is measured at the aggregate of the fair values at the date of exchange, of assets given,
liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the entity being
acquired, together with any costs directly attributable to the business combination. The results of the acquired entities are
included in the consolidated income statement from the date on which effective control is obtained, with there being no
business combinations since 1 January 2013. The identifiable assets, liabilities and contingent liabilities of the entity being
acquired that meet the conditions for recognition are recognized at their fair values on the date of acquisition.
34
FINANCIAL INFORMATION
Identifiable intangible assets are capitalized at fair value as at the date of acquisition. The useful lives of these intangible
assets are assessed and amortization is charged on a straight-line basis, with the expense taken to the income statement
within sales and marketing expense (in respect of customer relationships) and research and development expense (in
respect of IPR and technology). Intangible assets are tested for impairment when a trigger event occurs. Useful lives are
also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.
Goodwill
Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the group’s interest
in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary at the date of acquisition.
Goodwill is initially recognized at cost and is subsequently measured at cost less any accumulated impairment losses.
For the purposes of impairment testing, goodwill is allocated to those cash-generating units of the group expected to benefit
from the synergies of the business combination. Cash-generating units to which goodwill has been allocated are tested
for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable
amount of the cash-generating unit is less than the carrying value of the unit, the impairment loss is allocated firstly to
reduce the carrying cost of any goodwill allocated to the unit and then to any other assets of the unit pro rata to the carrying
value of each asset of the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.
Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for
goods and services provided in the normal course of business, net of discounts and sales-related taxes.
Sales of perpetual software licenses are recognized once no significant obligations remain owing to the customer in
connection with such license sale. Such significant obligations could include giving a customer a right to return the software
product without any preconditions, or if the group is unable to deliver a material element of the software product by the
balance sheet date. Sales of software subscription contracts, sometimes known as software-as-a-service contracts, are
deferred and recognized over the period of the agreements.
Revenues relating to maintenance, hosting and post-contract support agreements are deferred and recognized over the
period of the agreements.
Revenues from implementation and consultancy services are recognized as the services are performed, or in the case of
fixed price or milestone-based projects, on a percentage basis as the work is completed and any relevant milestones are
met, using latest estimates to determine the expected duration and cost of the project.
Impact of IFRS 15
IFRS 15 Revenue from Contracts with Customers will supersede the current revenue recognition guidance including
IAS 18 Revenue and related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange. Under IFRS 15, the entity recognizes revenue when
(or as) a performance obligation is satisfied, which occurs when control of the goods or services underlying the relevant
performance obligation is transferred to the customer. The standard contains very prescriptive guidance in relation to the
identification of performance obligations, the considerations of whether a company is acting as principal or agent, as well as
licensing application guidance.
In assessing sales of software licenses, the licensing application guidance in IFRS 15 is to determine whether the license
grants customers a right to use the underlying intellectual property (which would result in transfer of control at a point
in time) or a right to access the intellectual property (which would result in transfer of control over time). The directors
have assessed that the methods currently used by the group to determine whether significant obligations remain are
consistent with these requirements. As regards maintenance, hosting and post-contract support agreements, as well as
implementation and consultancy services and software-as-a-service contracts, the directors have assessed that these
performance obligations are satisfied over time and that the methods currently used to measure progress will continue to
be appropriate.
Apart from providing more extensive disclosures on the group’s revenue transactions, the directors do not anticipate that
the application of IFRS 15 will have a significant impact on the financial position and/or the financial performance of the
group.
FINANCIAL INFORMATION
35
Leases
Assets held under finance leases are recognized as assets with the corresponding liability to the lessor recognized as a
finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation.
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the
relevant lease.
Impact of IFRS 16
Adoption of IFRS 16 Leases will result in the group recognizing right of use assets and lease liabilities for all contracts that
are, or contain, a lease. For leases currently classified as operating leases, under current accounting requirements the
group does not recognize related assets or liabilities, and instead spreads the lease payments on a straight-line basis over
the lease term, disclosing in its annual financial statements the total commitment. The group will only recognize leases on
balance sheet as at 1 January 2019. In addition, it will measure right-of-use assets by reference to the measurement of the
lease liability on that date. This will ensure there is no immediate impact to net assets on that date. At 31 December 2017
operating lease commitments amounted to $1,890,000. Instead of recognizing an operating expense for its operating lease
payments, the group will instead recognize interest on its lease liabilities and amortization on its right-of-use assets. This
will increase reported EBITDA by the amount of its current operating lease cost.
Interest on Borrowings
All interest on borrowings is recognized in the income statement using the effective interest rate method.
Retirement Benefit Costs
Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. The group does not
operate any defined benefit retirement plans.
Foreign Currencies
The individual financial statements of each group entity are prepared in the currency of the primary economic
environment in which the entity operates (its functional currency). In preparing the financial statements of the individual
entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at rates
approximating to the transaction rates. At each balance sheet date, monetary items denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary
items, and on the retranslation of monetary items, are included in the income statement for the period.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the group’s foreign operations
are expressed in US Dollars using exchange rates prevailing on the balance sheet date. Income and expense items
(including comparatives) are translated at the average exchange rates for the period. Exchange differences arising
(including exchange differences on intra-group loans where there is no intention that these should be settled) are
classified as equity and transferred to the group’s translation reserve. The same approach is used to translate the financial
statements of the company on a stand-alone basis from Sterling to US Dollars. The equity of the company and group is
retranslated into the presentational currency at its historic rate.
Deferred Tax
Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets
are recognized only to the extent that the level and timing of taxable profits can be measured and it is probable that these
will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at tax rates that have been enacted or substantively enacted at the balance sheet date, and that
are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited to
profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
36
FINANCIAL INFORMATION
Property, Plant and Equipment
Computer equipment and fixtures and fittings are stated at cost less accumulated depreciation and any accumulated
impairment losses. Depreciation is charged so as to write off the costs of assets over their estimated useful lives, using the
straight-line method.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the
difference between the sale proceeds and the carrying amount of the asset and is recognized in the income statement.
The following rates are used for the depreciation of property, plant and equipment:
Computer equipment
Furniture and fittings
20-33 percent on a straight-line basis
20-25 percent on a straight-line basis
Investments
Investments in subsidiaries within the company balance sheet are stated at cost less impairment. Impairment tests are
undertaken whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Where the carrying value of an investment exceeds its recoverable amount, the investment is written down accordingly.
Internally Generated Intangible Assets (Research and Development Expenditure)
Development expenditure on internally developed software products is capitalized if it can be demonstrated that:
• it is technically feasible to develop the product;
• adequate resources are available to complete the development;
• there is an intention to complete and sell the product;
• the group is able to sell the product;
• sales of the product will generate future economic benefits; and
• expenditure on the product can be measured reliably.
Development costs not satisfying the above criteria and expenditure on the research phase of internal projects are
recognized in the income statement as incurred. Capitalization of a particular activity commences after proof of concept,
requirements and functional concept stages are complete.
Capitalized development costs are amortized over the period over which the group expects to benefit from selling the
product developed. This has been estimated to be four years from the date of code-finalization of the applicable software
release. The amortization expense in respect of internally generated intangible assets is included in research and
development costs.
Impairment of Tangible and Intangible Assets (excluding Goodwill)
At each balance sheet date, the group reviews the carrying amounts of its tangible 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 (if any). Where it is
not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
Recoverable amount is the higher of the fair value less costs to sell and value in use. In assessing the value in use, the
estimated future cash flows are discounted to their net 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.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying
amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized
immediately in the administrative expenses line item in the income statement.
Where an impairment loss subsequently reverses, the carrying value of the asset or cash-generating unit is increased to
the revised recoverable amount, but so that the increased carrying amount does not exceed the carrying amount which
would have been determined had no impairment loss been recognized in prior years. A reversal of an impairment loss is
recognized immediately in profit or loss.
FINANCIAL INFORMATION
37
Share-based Payments
The group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are
measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value
determined at the date of grant is expensed on a straight-line basis over the vesting period, based on the group’s estimate
of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.
Fair value is measured by the binomial option-pricing model. The expected life used in the model had been adjusted, based
on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations.
As set out in Note 23, the group has also issued warrants to certain financing institutions which are also treated as equity-
settled share-based payments.
Financial Instruments
1. Financial Assets
Unless otherwise indicated, the carrying values of the group’s financial assets are a reasonable approximation of their
fair values.
Loans and Receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. They arise principally through the provision of goods and services (e.g. trade receivables) but also include cash and
cash equivalents and other types of contractual monetary asset. They are initially recognized at fair value plus transaction
costs that are directly attributable to the acquisition or issue and subsequently carried at amortized cost using the effective
interest rate method, less provision for impairment. The effect of discounting on these financial instruments is not considered
material.
Impairment provisions are recognized when there is objective evidence (such as significant financial difficulties, default or
significant delay in payment on the part of the counter-party) that the group will be unable to collect all the amounts due
under the terms of the receivable, the amount of such provision being the difference between the net carrying amount and
the present value of the future expected cash flows associated with the receivable. For trade receivables, such provisions
are recorded in a separate allowance account with the loss being recognized within administrative expenses in the income
statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off
against the associated provision.
Impact of IFRS 9
IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018, with early application
permitted. The group plans to adopt the new standard on the required effective date. The group has performed an initial
assessment of all three aspects of IFRS 9, and overall the group expects no significant impact on its statement of financial
position and equity. This assessment is based on currently available information and may be subject to changes arising from
further reasonable and supportable information being made available to the group in 2018 when the group will adopt IFRS 9.
2. Financial Liabilities
The group classifies its financial liabilities in the category of financial liabilities at amortized cost.
Financial liabilities measured at amortized cost include:
• Trade payables and other short-dated monetary liabilities, which are initially recognized at fair value and subsequently
carried at amortized cost using the effective interest rate method.
• Bank and other borrowings (including the host debt element of the convertible loan noted above), which are initially
recognized at fair value net of any transaction costs directly attributable to the acquisition of the instrument. Such
interest-bearing liabilities are subsequently measured at amortized cost using the effective interest rate method, which
ensures that the interest expense over the period to repayment is at a constant rate on the balance of the liability
carried in the balance sheet. Interest expense in this context includes initial transaction costs and premiums payable on
redemption, as well as any interest payable while the liability is outstanding.
Unless otherwise indicated, the carrying values of the group’s financial liabilities measured at amortized cost represent a
reasonable approximation of their fair values.
38
FINANCIAL INFORMATION
3. Convertible Loan Stock
The host debt element of convertible loan stock is treated as a financial liability measured at amortized cost as further
described above. The equity component of convertible loan stock arising on issue is reclassified from debt to capital
reserves, and then transferred to retained earnings upon conversion or maturity.
4. Share Capital
Financial instruments issued by the group are treated as equity only to the extent that they do not meet the definition
of a financial liability. The group’s ordinary shares are classified as equity. For the purpose of the disclosures given in
Note 23, the group considers its capital to comprise its ordinary share capital, its capital reserves (as set out in Note
24), and its retained earnings.
Significant Accounting Estimates and Judgments
Management is required to make judgments, estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based
on historical experience and other factors that are considered to be relevant. Actual results may differ from these
estimates, and accordingly they are reviewed on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and
future periods if the revision affects both current and future periods.
Estimates and judgments adopted for property plant and equipment, externally acquired intangible assets and internally
generated intangible assets are dealt with in the accounting policy notes set forth above that relate to these areas.
Where sales contracts involve multiple elements, the entire fee is allocated to each of the individual elements based
on management's best estimate of each element's fair value. In assessing the fair value, management consider factors
such as what the individual elements would be sold at on a stand-alone basis and the cost of satisfying a performance
obligation plus an appropriate margin.
FINANCIAL INFORMATION
39
3 . S E G M E N TA L A N A LY S I S
All of the group’s revenue in respect of the years ended 31 December 2017 and 2016 was derived from the design,
development and marketing of software products with associated implementation and consultancy services, as more
particularly described in the Strategic and Financial Reports. For management purposes, the group is organized
geographically across two principal operating segments. The first segment is North America, and the second Europe.
Information relating to these two segments is given below.
The information in the following table relating to external revenues includes analysis both by location of customer and
by location of operations. The information relating to other items provides analysis by location of operations only. Inter-
segment revenues are priced on an arm’s length basis.
Year ended 31 December 2017
Income Statement
External revenues – by location of operations
Operating profit before interest and tax
Profit before tax
Finance income
Finance expense
Depreciation and amortization
EBITDA
Balance Sheet
Fixed asset additions
Capitalization of internally generated development costs
Total assets
Total liabilities
Year ended 31 December 2016
Income Statement
External revenues – by location of operations
Operating profit/(loss) before interest and tax
Profit/(loss) before tax
Finance income
Finance expense
Depreciation and amortization
EBITDA/(LBITDA)
Balance Sheet
Fixed asset additions
Capitalization of internally generated development costs
Total assets
Total liabilities
North
America
$’000
Europe
$’000
Total
$’000
17,274
5,133
5,077
6
(62)
(2,326)
7,459
––––––––
11,260
464
58
-
(406)
(47)
511
––––––––
254
2,519
25,902
(12,217)
––––––––
––––––––
112
-
10,481
(5,566)
––––––––
––––––––
28,534
5,597
5,135
6
(468)
(2,373)
7,970
––––––––
366
2,519
36,383
(17,783)
––––––––
––––––––
North
America
$’000
Europe
$’000
Total
$’000
17,172
4,136
4,072
-
(64)
(2,191)
6,327
––––––––
6,031
(813)
(1,038)
1
(226)
(41)
(772)
––––––––
214
1,933
22,211
(11,046)
––––––––
––––––––
36
-
4,613
(5,421)
––––––––
––––––––
23,203
3,323
3,034
1
(290)
(2,232)
5,555
––––––––
250
1,933
26,824
(16,467)
––––––––
––––––––
One customer, located in North America, accounted for approximately 7 percent of the group’s revenues in 2017. The
same customer accounted for approximately 20 percent of the group’s revenues in 2016.
External revenues in 2017 exclude inter-segmental revenues which amounted to $4,007,000 (2016: $1,715,000) for
North America and $479,000 (2016: $378,000) for Europe.
Revenues attributable to customers in North America in 2017 amounted to $16,697,000 (2016: $16,458,000). Revenue
attributable to customers in the rest of the world amounted to $11,837,000 (2016: $6,745,000) of which $11,038,000
(2016: $6,109,000) was attributable to customers in Europe.
40
FINANCIAL INFORMATION
4 . E B I T D A
The directors consider that EBITDA, which is defined as earnings before interest, tax, depreciation and amortization, is an
important measure, since it is widely used by the investment community. It is calculated as follows:
Profit for the year before tax
Interest payable
Interest receivable
Amortization of intangible assets
Depreciation of property, plant and equipment
EBITDA
5 . P R O F I T F O R T H E Y E A R
The profit for the year has been arrived at after charging/(crediting):
Net foreign exchange (gains)/losses
Research and development costs (excluding amortization)
Amortization of intangible assets
Depreciation of property, plant and equipment
Operating lease rentals – land and buildings
Operating lease rentals – other
2017
$’000
2016
$’000
5,135
3,034
468
(6)
2,167
206
––––––––
7,970
––––––––
––––––––
290
(1)
2,043
189
––––––––
5,555
––––––––
––––––––
2017
$’000
2016
$’000
(6)
2,099
2,167
206
562
103
––––––––
––––––––
(312)
1,838
2,043
189
551
96
––––––––
––––––––
Net foreign exchange gains or losses arise on the translation of cash and trade balances held in currencies other than the
functional currency of the entity concerned and are accordingly included in administration expense.
6 . A U D I T O R S ’ R E M U N E R AT I O N
During the year the group obtained the following services from its auditors and associated firms.
Audit of the financial statements of the group
Audit of the financial statements of the UK subsidiary
Review of interim financial information
Other services
Tax compliance services
2017
$’000
2016
$’000
64
5
16
13
14
––––––––
––––––––
66
5
16
-
20
––––––––
––––––––
7 . S TA F F C O S T S
Wages and salaries
Social security costs
Pension contributions
Employee benefits expense
FINANCIAL INFORMATION
41
2017
$’000
2016
$’000
14,439
1,171
369
823
–––––––
16,802
––––––––
––––––––
12,590
991
269
850
–––––––
14,700
––––––––
––––––––
Included within the above are staff costs capitalized as development expenditure amounting to $2,519,000 (2016: $1,933,000).
Included within wages and salaries are bonus and sales commission costs amounting to $2,538,000 (2016: $2,094,000).
The average monthly number of employees during the year was made up as follows:
Development and operations
Sales and management
2017
Number
2016
Number
83
42
–––––––
125
––––––––
––––––––
71
39
–––––––
110
––––––––
––––––––
The above staff costs and the numbers of employees during the year include the executive directors.
The remuneration of all directors was as follows:
Fees and emoluments
Pension contributions
2017
$’000
2016
$’000
1,073
25
––––––––
1,098
––––––––
––––––––
1,056
23
––––––––
1,079
––––––––
––––––––
No director exercised share options during the year (2016: None). Pension contributions are to personal defined contribution
schemes and have been made for three directors (2016: three) who served during the year.
Full details of directors’ remuneration are disclosed in the Report on Directors’ Remuneration on page 17.
Staff costs in the parent company amounted to $585,000 including bonuses (2016: $453,000). The average monthly number
of staff during the year included 1 full time and 2 part time (2016: 1 and 2).
8 . F I N A N C E I N C O M E
Income on financial assets measured at amortized cost Interest income on bank deposits
9 . F I N A N C E E X P E N S E
Interest expense on financial liabilities measured at amortized cost
Interest on borrowings
2017
$’000
6
––––––––
––––––––
2016
$’000
1
––––––––
––––––––
2017
$’000
2016
$’000
(468)
––––––––
––––––––
(290)
––––––––
––––––––
Included in interest expense is a one-off payment to holders of the group’s 8% Convertible Loan Stock amounting to $201,000
in recognition of the loss of their interest and repayment rights as a result of the early conversion.
42
FINANCIAL INFORMATION
1 0 . I N C O M E TA X C R E D I T
Income tax credit for the year – current tax
The charge for the year can be reconciled to the accounting profit as follows:
Profit before tax
Tax charge at the UK corporation tax rate of 19.25% (2016: 20%)
Adjustment for differing rates of corporate taxation in overseas jurisdictions
Tax effect of expenses that are not deductible in determining taxable losses
Temporary differences arising from the capitalization
and transfer of development investments
Utilization of prior year losses
Current tax expense for the year
Recognition of deferred tax asset
Total income tax credit for the year
2017
$’000
2016
$’000
243
––––––––
––––––––
1,275
––––––––
––––––––
2017
$’000
2016
$’000
5,135
––––––––
––––––––
(988)
(168)
(76)
70
733
––––––––
(429)
––––––––
672
––––––––
243
––––––––
––––––––
3,034
––––––––
––––––––
(607)
(428)
(50)
224
798
––––––––
(63)
––––––––
1,338
––––––––
1,275
––––––––
––––––––
The current tax expense represents US Alternative Minimum Tax (“AMT”), which is payable by the group’s US
subsidiaries notwithstanding the availability of tax losses from prior years, and German corporation tax payable by
Sopheon GmbH.
The deferred tax income represents the recognition of a deferred tax asset arising from historic trading losses of the
group’s US and UK subsidiaries.
There is no tax arising on other comprehensive income.
Deferred Tax Asset
The group has a potential deferred tax asset arising from its unrelieved trading losses, which has been partially
recognized during the year, but the remainder of which has not been recognized owing to uncertainty as to the level
and timing of taxable profits in the future.
The deferred tax asset which has been recognized in the financial statements is as follows:
Amount recognized during the year
Deferred tax asset at 31 December 2017
The unrecognized deferred tax asset is made up as follows:
Shortfall of tax depreciation compared to book depreciation
Effect of timing differences arising from capitalization
of internally generated development costs
Unrelieved trading losses
Unrecognized deferred tax asset at 31 December 2017
2017
$’000
2016
$’000
672
––––––––
2,010
––––––––
––––––––
1,338
––––––––
1,338
––––––––
––––––––
2017
$’000
2016
$’000
114
146
(1,010)
10,943
––––––––
10,047
––––––––
––––––––
(1,560)
17,448
––––––––
16,034
––––––––
––––––––
FINANCIAL INFORMATION
43
At 31 December 2017, tax losses estimated at $63m (2016: $64m) were available to carry forward by the Sopheon
group, arising from historic losses incurred. These losses have given rise to a deferred tax asset of $2.0m (2016:
$1.3m) and a further potential deferred tax asset of $10.9m (2016: $17.4m), based on the tax rates currently applicable
in the relevant tax jurisdictions.
Of these tax losses, an aggregate amount of $9.0m, representing $1.9m of the potential deferred tax asset (2016:
$9.4m and $3.3m respectively) represents pre-acquisition tax losses of Alignent Software, Inc. The future utilization of
these losses may be restricted under Section 382 of the US Internal Revenue Code, whereby the ability to utilize net
operating losses arising prior to a change of ownership is limited to a percentage of the entity value of the corporation
at the date of change of ownership.
11 . P R O F I T / ( L O S S ) D E A LT W I T H I N T H E F I N A N C I A L S TAT E M E N T S O F T H E
P A R E N T C O M PA N Y
The profit dealt with in the financial statements of the parent company for the year ended 31 December 2017 was
$4,199,000 (2016: loss of $390,000). The parent company’s result for 2017 includes the partial recognition amounting
to $4,664,000 of long-term loans due to the parent company from subsidiary companies, which previously had been
subject to full provision. Advantage has been taken of Section 408 of the Companies Act 2006 not to present an income
statement for the parent company.
1 2 . E A R N I N G S P E R S H A R E
Basic earnings per share
Profit after tax
Weighted average number of ordinary shares for
the purpose of basic earnings per share
Diluted earnings per share
Profit after tax
Reduction in interest expense in respect of convertible loan stock
Diluted profit after tax
Weighted average number of ordinary shares for
the purpose of basic earnings per share
2017
$’000
2016
$’000
5,378
––––––––
––––––––
4,309
––––––––
––––––––
’000s
’000s
7,478
––––––––
––––––––
7,297
––––––––
––––––––
$’000
$’000
5,378
399
––––––––
5,777
––––––––
––––––––
4,309
217
––––––––
4,526
––––––––
––––––––
’000s
’000s
10,331
––––––––
––––––––
10,205
––––––––
––––––––
For the purpose of calculating the diluted earnings per ordinary share in 2017 and 2016, the profit attributable to
ordinary shareholders is adjusted on the assumption that the group’s convertible loan stock was converted into ordinary
shares at 1st January in the relevant year, and that options to subscribe for Sopheon shares at prices below the
average share price prevailing during the year were exercised at that date (or, if later, on the date of grant).
Diluted earnings per share are calculated in respect of the convertible loan stock, by adjusting earnings for the amount
of interest which would cease to be payable following conversion and by adjusting the number of shares in issue by the
number of shares which would fall to be issued on conversion. The amount of the adjustment in respect of 2017 also
includes the additional interest payment of $201,000 to holders of the convertible loan stock in consideration for the
early conversion of the stock in December 2017, full details of which are set out in Note 20.
In respect of outstanding 745,589 share options (details of which are set out in Note 28), the treasury stock method is
used, assuming that the proceeds from exercise of options at strike prices below the average market price for Sopheon
shares during the year are reinvested in treasury shares at the average price prevailing during the year.
44
FINANCIAL INFORMATION
1 3 . 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 2016
Additions
Exchange differences
At 1 January 2017
Additions
Exchange differences
At 31 December 2017
Accumulated Depreciation
At 1 January 2016
Depreciation charge for the year
Exchange differences
At 1 January 2017
Depreciation charge for the year
Exchange differences
At 31 December 2017
Carrying Amount
At 31 December 2017
At 31 December 2016
Company
The company has no property, plant and equipment.
Computer
Equipment
$’000
Furniture
& Fittings
$’000
1,880
245
(17)
360
5
(2)
––––––––
2,108
286
30
––––––––
2,424
––––––––
––––––––
363
81
19
––––––––
463
––––––––
1,722
170
(15)
337
19
(3)
––––––––
1,877
183
24
––––––––
2,084
––––––––
––––––––
353
23
10
––––––––
386
––––––––
Total
$’000
2,240
250
(19)
––––––––
2,471
367
49
––––––––
2,887
––––––––
2,059
189
(18)
––––––––
2,230
206
34
––––––––
2,470
––––––––
340
––––––––
––––––––
231
––––––––
––––––––
77
––––––––
––––––––
10
––––––––
––––––––
417
––––––––
––––––––
241
––––––––
––––––––
1 4 . I N TA N G I B L E A S S E T S
Cost
At 1 January 2016
Additions (internally generated)
At 1 January 2017
Additions (internally generated)
At 31 December 2017
Amortization
At 1 January 2016
Charge for the year
At 1 January 2017
Charge for the year
At 31 December 2017
Carrying Amount
At 31 December 2017
At 31 December 2016
FINANCIAL INFORMATION
45
Development
Costs
(Internally
Generated)
$’000
Goodwill
$’000
Total
$’000
19,713
1,933
––––––––
21,646
2,519
––––––––
24,165
––––––––
15,156
2,043
––––––––
17,199
2,167
––––––––
19,366
––––––––
1,022
-
––––––––
1,022
-
––––––––
1,022
––––––––
-
-
––––––––
-
-
––––––––
-
––––––––
20,735
1,933
––––––––
22,668
2,519
––––––––
25,187
––––––––
15,156
2,043
––––––––
17,199
2,167
––––––––
19,366
––––––––
4,799
––––––––
––––––––
4,447
––––––––
––––––––
1,022
––––––––
––––––––
1,022
––––––––
––––––––
5,821
––––––––
––––––––
5,469
––––––––
––––––––
The amortization period for the internally generated development costs relating to the group’s software products is
four years. Goodwill is not amortized. The residual goodwill arising on the acquisition of Alignent is attributable to the
enhanced market position of each of the group’s operating segments, due to the completeness of the solution that
Sopheon can offer the market. The recoverable amount of the goodwill can be underpinned on a value in use basis by
the expected performance of the group, treated as a single cash-generating unit.
The valuation used for this purpose is based on cash flow projections for the next five years, and thereafter for an
indefinite period at a growth assumption of 3 percent. The discount rate used was 14.6 percent. Sensitivity analysis
performed on these projections demonstrates significant valuation headroom above the carrying value of goodwill. The
same discount and growth rates were used for the valuation conducted in respect of 2016.
Company
The company has no intangible assets.
1 5 . I N V E S T M E N T I N S U B S I D I A R I E S
At cost less amounts provided
At 31 December 2016
Exchange difference
At 31 December 2017
Company
$’000
7,528
740
––––––––
8,268
––––––––
––––––––
46
FINANCIAL INFORMATION
Details of the company’s subsidiaries at 31 December 2017 are set out below. Companies marked with an asterisk (*) are
held via Sopheon UK Ltd and those with an obelus (†) are held via Orbital Software Holdings plc. The common stock of
Alignent Software, Inc. and Sopheon Corporation, Minnesota, USA are held by Sopheon Corporation, Delaware, USA. The
share capital of Sopheon Corporation, Delaware, USA and Sopheon GmbH are held by Sopheon NV.
Name of Company
Place of Incorporation
Nature of
Ownership
Proportion of
Voting Rights Held
Nature of Business
Sopheon Corporation
3001 Metro Drive
Bloomington, MN 55425, USA
Sopheon Corporation
6870 W 52nd Avenue
Arvada, CO 80002, USA
Alignent Software, Inc.
3001 Metro Drive
Bloomington, MN 55425, USA
Sopheon NV
Kantoorgebouw Officia 1
De Boelelaan 7, 1083 HJ
Amsterdam, The Netherlands
Sopheon UK Ltd
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
Sopheon GmbH
Lise-Meitner-Str. 10, D-64293
Darmstadt, Germany
Orbital Software Holdings plc
Saltire Court, 20 Castle Terrace
Edinburgh EH1 2EN, UK
Orbital Software Inc.†
3001 Metro Drive
Bloomington, MN 55425, USA
Sopheon Edinburgh Ltd†
Saltire Court, 20 Castle Terrace
Edinburgh EH1 2EN, UK
Orbital Software Europe Ltd†
Saltire Court, 20 Castle Terrace
Edinburgh EH1 2EN, UK
Network Managers (UK) Ltd*
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
AppliedNet Ltd*
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
Future Tense Ltd*
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
Polydoc Ltd
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
Applied Network Technology Ltd*
Dorna House One, 50 Guildford Road
West End GU24 9PW, UK
Common Stock
100%
Software sales and services
Common Stock
100%
Software development and sales
Common Stock
100%
Software sales and services
Ordinary Shares
100%
Software sales and services
Ordinary Shares
100%
Software sales and services
Ordinary Shares
100%
Software sales and services
Ordinary Shares
100%
Holding company
Common Stock
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Employee Share Ownership
Trust
FINANCIAL INFORMATION
47
1 6 . O T H E R R E C E I VA B L E
Other receivable
Amounts due from subsidiary undertakings
(net of provisions)
Group
Company
2017
$’000
2016
$’000
2017
$’000
19
19
-
2016
$’000
-
-
––––––––
19
––––––––
––––––––
-
––––––––
19
––––––––
––––––––
4,664
––––––––
4,664
––––––––
––––––––
-
––––––––
-
––––––––
––––––––
The other receivable represents a deposit paid in respect of a property leased by the group.
A partial provision of $47,681,000 has been made against amounts totaling $52,345,000 (2016: full provision of
$48,386,000) owed to the parent company by subsidiary undertakings, which are due after more than one year and are
subordinated to the claims of all other creditors.
1 7 . T R A D E A N D O T H E R R E C E I VA B L E S
Trade receivables
Other receivables
Total receivables
Prepayments
Accrued income
Group
Company
2017
$’000
2016
$’000
2017
$’000
2016
$’000
14,205
57
––––––––
14,262
743
382
––––––––
15,387
––––––––
––––––––
8,655
50
––––––––
8,705
648
343
––––––––
9,696
––––––––
––––––––
-
81
––––––––
81
15
-
––––––––
96
––––––––
––––––––
-
42
––––––––
42
3
-
––––––––
45
––––––––
––––––––
Trade and other receivables are stated net of allowances totaling $Nil (2016: $Nil) for estimated irrecoverable amounts.
The directors consider that the carrying amount of trade and other receivables approximates to their fair value
1 8 . C A S H A N D C A S H E Q U I VA L E N T S
Cash at bank
Short-term bank deposits
Group
Company
2017
$’000
2016
$’000
2017
$’000
2016
$’000
3,977
8,752
––––––––
12,729
––––––––
––––––––
9,253
808
––––––––
10,061
––––––––
––––––––
1,492
-
––––––––
1,492
––––––––
––––––––
1,197
-
––––––––
1,197
––––––––
––––––––
Cash and cash equivalents comprise cash held by the group, bank current accounts and short-term bank deposit accounts
with maturities of three months or less and bearing interest at variable rates. The carrying amount of these assets
represents a reasonable approximation to their fair value.
Included in cash at bank of the group is an amount of $33,000 (2016: $30,000) held by the group’s employee share
ownership trust.
48
FINANCIAL INFORMATION
1 9 . T R A D E A N D O T H E R PAYA B L E S
Trade payables
Other payables
Tax and social security costs
Accruals
Group
Company
2017
$’000
2016
$’000
2017
$’000
2016
$’000
1,126
373
1,148
3,592
––––––––
6,239
––––––––
––––––––
967
294
230
2,937
––––––––
4,428
––––––––
––––––––
71
135
-
656
––––––––
862
––––––––
––––––––
28
128
-
360
––––––––
516
––––––––
––––––––
Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The directors consider that the carrying amounts of trade and other payables represent a reasonable approximation to their
fair values.
2 0 . B O R R O W I N G S
Current Loans and Borrowings
Line of credit
Loan notes (current portion)
Total current loans and borrowings
Non-current Loans and Borrowings
Loan notes (non-current portion)
8% convertible loan stock 2019
Total non-current loans and borrowings
Total loans and borrowings
Group
Company
2017
$’000
2016
$’000
2017
$’000
2016
$’000
3,000
171
––––––––
3,171
3,000
167
––––––––
3,167
-
-
––––––––
-
-
-
––––––––
-
28
-
––––––––
28
––––––––
3,199
––––––––
––––––––
200
2,448
––––––––
2,648
––––––––
5,815
––––––––
––––––––
-
-
––––––––
-
––––––––
-
––––––––
––––––––
-
2,448
––––––––
2,448
––––––––
2,448
––––––––
––––––––
The following is an analysis of the group’s movements in loans and borrowings, analyzed between cash and non-cash
changes:
Line of credit
Loan notes
8% convertible loan stock
Total loans and borrowings
2016
$’000
Cash
Flows
$’000
3,000
367
2,448
––––––––
5,815
––––––––
––––––––
-
(168)
-
––––––––
(168)
––––––––
––––––––
Settled
Through
Equity
$’000
-
-
(2,448)
––––––––
(2,448)
––––––––
––––––––
2017
$’000
3,000
199
-
––––––––
3,199
––––––––
––––––––
FINANCIAL INFORMATION
49
a) Line of Credit and Loan Notes
In February 2014, the group established new credit facilities with Silicon Valley Bank, which were renewed and extended
in March 2016. The facilities comprise a $3m revolving line of credit and a term loan of $0.5m repayable in equal
installments until maturity at the end of January 2019. Both facilities bear interest at rates of 2.75 percent above the WSJ
Prime Rate, resulting in a current effective rate of 7.25 percent. The facilities are subject to covenants based on operating
results, and in addition, the drawdown mechanics and interest rates are subject to certain working capital ratios.
The directors consider that the carrying amounts for loan notes, and the line of credit, represent a reasonable
approximation of the financial instruments’ fair values.
b) 8 Percent Convertible Loan Stock 2019
The convertible loan stock, all of which was converted into Sopheon shares during the year, was denominated in Sterling
and bears interest at a fixed rate of 8 percent per annum.
The nominal amount outstanding at 1 January 2017 was £1,990,000 ($2,448,000). The loan stock was convertible into
Sopheon shares, at the rate of 76.5p nominal value of loan stock per Sopheon share, at any time until the final maturity
date of 31 January 2019.
On 26 May 2017, £50,000 nominal of loan stock was converted into Sopheon shares, resulting in the issue of 65,359
Sopheon shares.
On 22 December 2017, pursuant to a resolution passed at a meeting of loan stockholders held on 7 December 2017, the
remaining £1,940,000 aggregate nominal amount outstanding was converted into Sopheon shares, resulting in the issue
of 2,535,947 Sopheon shares. In consideration for the early conversion of the loan stock, loan stockholders received a
one-off payment of 8 percent of the nominal value of the loan stock then outstanding.
2 1 . O P E R AT I N G L E A S E A R R A N G E M E N T S
At the balance sheet date the group had outstanding commitments under operating leases in respect of which the total
future minimum lease payments were due as follows:
Due within one year
Due after one year and within five years
Land &
Buildings
2017
$’000
542
1,348
––––––––
1,890
––––––––
––––––––
Other
2017
$’000
105
164
––––––––
269
––––––––
––––––––
Land &
Buildings
2016
$’000
429
422
––––––––
851
––––––––
––––––––
Other
2016
$’000
77
168
––––––––
245
––––––––
––––––––
The group leases its office accommodation in the US, UK and the Netherlands and has operating leases for office
equipment and vehicles.
Company
The company has no operating leases.
50
FINANCIAL INFORMATION
2 2 . F I N A N C I A L I N S T R U M E N T S
Categories of Financial Assets and Liabilities
The following table sets out the categories of financial instruments held by the group. All of the group’s financial assets
are in the category of loans and receivables, and all of its financial liabilities are in the category of financial liabilities
measured at amortized cost.
1. Financial Assets
Current Financial Assets
Trade receivables
Other receivables
Amounts due from subsidiary companies
Accrued income
Cash and cash equivalents
Non-current Financial Assets
Other receivable
Group
Company
Notes
2017
$’000
2016
$’000
2017
$’000
2016
$’000
17
17
16
17
18
14,205
57
-
743
12,729
––––––––
27,734
––––––––
––––––––
8,655
50
-
343
10,061
––––––––
19,109
––––––––
––––––––
-
81
3,472
-
1,492
––––––––
5,045
––––––––
––––––––
-
42
-
-
1,107
––––––––
1,149
––––––––
––––––––
16
19
––––––––
––––––––
19
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The group does not have any financial assets in any other categories.
2. Financial Liabilities
Current Financial Liabilities
Trade payables
Other payables
Accruals
Loans and borrowings
Non-current Financial Liabilities
Loans and borrowings
8% convertible loan stock 2019
Group
Company
Notes
2017
$’000
2016
$’000
2017
$’000
2016
$’000
19
19
19
20
20
20
1,126
373
3,592
3,171
––––––––
8,262
––––––––
28
-
––––––––
28
––––––––
8,290
––––––––
––––––––
967
294
2,937
3,167
––––––––
7,365
––––––––
200
2,448
––––––––
2,648
––––––––
10,013
––––––––
––––––––
71
135
656
-
––––––––
862
––––––––
-
-
––––––––
-
––––––––
862
––––––––
––––––––
28
128
360
-
––––––––
516
––––––––
-
2,448
––––––––
2,448
––––––––
2,964
––––––––
––––––––
FINANCIAL INFORMATION
51
Financial Instrument Risk Exposure and Management
The group is exposed to risks that arise from its use of financial instruments. This note describes the group’s objectives,
policies and processes for managing those risks and the methods used to measure them.
There have been no changes in the group’s exposure to financial instrument risks, its objectives, policies and
processes for managing those risks or the methods used to measure them from previous periods, unless otherwise
disclosed in this note.
Principal Financial Instruments
The principal financial instruments used by the group, from which financial instrument risk arises, are as follows:
• Trade and other receivables
• Cash and cash equivalents
• Trade and other payables
• Loan notes
• Bank line of credit
• Convertible loan stock
General Objectives, Policies and Processes
The board has overall responsibility for the determination of the group’s risk management objectives and policies and,
while retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that
ensure the effective implementation of the objectives and policies to the group’s finance function. The board receives
quarterly reports from the group finance director through which it reviews the effectiveness of the processes put in
place and the appropriateness of the objectives and policies it sets. The group’s risk management procedures are also
reviewed periodically by the audit committee.
The overall objective of the board is to set policies that seek to reduce risk as far as possible without unduly affecting
the group’s competitiveness and flexibility. Further details regarding these policies are set out below:
a) Credit Risk
Credit risk arises principally from the group’s trade receivables, other receivables and accrued income. It is the risk that
the counterparty fails to discharge its obligations in respect of the instrument.
The group’s software is principally marketed at major international corporations of good credit standing, and the group’s
historical bad debt experience is very low. Due to the potentially large size of certain individual sales, in a particular
year one customer can account for a substantial proportion of revenues recorded. However, such concentrations rarely
persist for multiple years and therefore the directors do not believe that the group is systematically exposed to credit
risk concentration in respect of particular customers. In 2017, the largest single customer accounted for 7 percent of
group revenues (2016: 20 percent of group revenues in respect of the same customer).
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. At the year-
end the group was holding a proportion of its deposits and bank balances with each of Lloyds Banking Group plc,
Rabobank Amsterdam, and Silicon Valley Bank.
The group's customers are major international corporations of high credit standing and therefore the group does not
typically obtain credit ratings for individual customers. Nevertheless, current economic conditions have resulted in
such major corporations slowing down payments and this is reflected in the ageing profile of the group’s receivables.
However, impairment of trade receivables is very rare, and in the two years ending 31 December 2017 provisions or
write offs against customer receivables amounted in total to less than 0.5 percent of revenues. Such impairments do
not arise from credit defaults, but principally from disagreements with a very small number of former customers over
their responsibility for renewal fees for maintenance or hosting contracts. Sopheon's policy is to pursue collection of
such fees where invoiced, and to make provision against the applicable receivable if collection is uncertain.
52
FINANCIAL INFORMATION
The following is an analysis of the group’s trade receivables identifying the totals of trade receivables that are current
and those that are past due but not impaired:
Total
$’000
Current
$’000
Past Due
+30 Days
$’000
Past Due
+60 Days
$’000
At 31 December 2017
At 31 December 2016
14,205
1,192
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
11,734
8,655
1,851
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
6,021
1,279
–––––––––
–––––––––
783
–––––––––
–––––––––
The following is an analysis of the group’s provisions against trade receivables, analyzed between the geographical
segments in which the group’s operations are located:
2017
$’000
Provision
$’000
Gross
Value
$’000
Carrying
Value
$’000
Gross
Value
2016
$’000
Provision
Trade receivables
North America
Europe
9,010
5,195
–––––––––
14,205
–––––––––
–––––––––
-
-
–––––––––
-
–––––––––
–––––––––
9,010
5,195
7,355
1,300
-
-
––––––––– ––––––––– –––––––––
-
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
14,205
8,655
$’000
Carrying
Value
7,355
1,300
–––––––––
8,655
–––––––––
–––––––––
The group records impairment losses on its trade receivables separately from the gross amounts receivable. No
impairment losses were recorded during 2017 or 2016. The main factors used in assessing the impairment of the
group’s trade receivables are the age of the balances and the circumstances of the individual customer.
The company has recognized a proportion of the amounts due to it from its US subsidiaries, taking into account their
current profitability and cash holdings. Full details are set out in Note 16 and 27. The company has provided in full for
the remaining amounts due from subsidiaries. The company is exposed to credit risk in respect of its cash and cash
equivalents, which are held in the form of current and deposit accounts with leading UK, US and European banking
institutions.
b) Liquidity Risk
Liquidity risk arises from the group’s management of working capital and more particularly its ability to be consistently
cash generative after finance charges and principal repayments on its debt instruments. It is the risk that the group will
encounter difficulties in meeting its financial obligations as they fall due.
The group’s policy is to maintain significant cash balances, short-term bank deposits and facilities with a view to having
sufficient cash to meet its liabilities when they become due. The board annually approves budgets including cash flow
projections for each of the operating companies within the group and receives regular information as to cash balances
held and progress against budget. Attention is particularly drawn to the detailed discussion of the factors that enable
the group to continue as a going concern for the foreseeable future in the section headed “Going Concern” in Note 2 to
the financial statements.
FINANCIAL INFORMATION
53
The following table sets out an analysis of the contractual maturity of the group’s and the company’s financial liabilities
that must be settled gross, based on exchange rates prevailing at the relevant balance sheet date.
Group
At 31 December 2017
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
At 31 December 2016
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
Company
At 31 December 2017
Trade and other payables
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
At 31 December 2016
Trade and other payables
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
On Demand
or Within
Six Months
$’000
1,499
3,000
86
5
-
210
–––––––––
4,800
–––––––––
–––––––––
On Demand
or Within
Six Months
$’000
1,261
3,000
86
11
-
98
–––––––––
4,456
–––––––––
–––––––––
On Demand
or Within
Six Months
$’000
206
-
210
–––––––––
416
–––––––––
–––––––––
On Demand
or Within
Six Months
$’000
490
-
98
–––––––––
588
–––––––––
–––––––––
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
-
-
28
-
-
-
-
-
86
3
-
-
-
-
-
-
-
-
––––––––– ––––––––– –––––––––
-
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
28
89
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
-
-
86
8
-
98
-
-
171
8
-
196
-
-
28
-
2,448
16
––––––––– ––––––––– –––––––––
2,492
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
375
192
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
-
-
-
-
-
-
-
-
-
––––––––– ––––––––– –––––––––
-
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
-
-
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
-
-
98
-
-
196
-
2,448
16
––––––––– ––––––––– –––––––––
2,464
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
196
98
Total
$’000
1,499
3,000
200
8
-
210
–––––––––
4,917
–––––––––
–––––––––
Total
$’000
1,261
3,000
371
27
2,448
408
–––––––––
7,515
–––––––––
–––––––––
Total
$’000
206
-
210
–––––––––
416
–––––––––
–––––––––
Total
$’000
490
2,448
408
–––––––––
3,346
–––––––––
–––––––––
54
FINANCIAL INFORMATION
c) Market Risk
Market risk arises from the group’s use of interest-bearing and foreign currency financial instruments. It is the risk that
the future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk)
or foreign exchange rates (currency risk). The group does not have any financial instruments that are publicly traded
securities and is not exposed to other price risk associated with changes in the market prices of such securities.
d) Interest Rate Risk
The group’s fixed rate interest bearing liabilities consist of the US Dollar fixed interest term loan notes amounting to
$200,000 at 31 December 2017. This liability does not give rise to interest rate risk. The group also has a revolving US
Dollar line of credit, on which $3,000,000 in aggregate was outstanding at 31 December 2017, and which bears interest
at a margin of 2.75 percent above the WSJ Prime Rate, currently representing an effective rate of 7.25 percent. Should
this rate have increased by 1 percent the annualized effect would have been to increase finance costs by $30,000.
The group invests its surplus cash in bank deposits denominated in US Dollars, Euros or Sterling, which bear interest
based on short-term money market rates, and in doing so exposes itself to fluctuations in money market interest rates.
The group’s surplus cash held in the form of bank deposits at 31 December 2017 was $8,752,000. During 2017 interest
rates on money market deposits averaged at or below 0.5 percent in respect of US Dollar, Euro and Sterling deposits.
The annualized effect of an increase of 0.5 percent in the average interest rate received on the group’s bank deposits
at the balance sheet date would result in an increase in the group’s and the company’s interest income of $44,000.
The company had no interest bearing bank deposits at the balance sheet date.
e) Currency Risk
The group’s policy is, where possible, to allow group entities to settle liabilities denominated in the functional currency
with cash generated from their own operations in that currency. The group also maintains cash and bank deposits in the
currencies that are the functional currencies of its operating entities, which are the US Dollar, the Euro and Sterling.
The group is exposed to currency risk in respect of foreign currency denominated bank deposits and bank loans. Taking
into account the fact that a large proportion of the group’s income and expenditure arise in US Dollars and, to a lesser
extent, in Euros, the group’s policy is not to seek to hedge such currency risk.
Foreign currency risk also arises where individual group entities enter into transactions denominated in currencies other
than their functional currency, with fluctuations in exchange rates giving rise to gains or losses in the income statement.
Where the foreign currency risk to the group is significant, consideration is given to hedging the risk through the forward
currency market and, while this would be an economic hedge of the cash-flow risk, the group does not employ hedge
accounting.
The following table shows the effects, all other things being equal, of changes to exchange rates on the group’s profit
after tax and on the exchange differences on retranslation of the assets and liabilities of foreign operations that is
recognized directly in equity. It illustrates the effects if the exchange rates for Sterling and the Euro against the US Dollar
had been higher or lower than those that actually applied during the year and at the year-end.
2017
2016
2017
2016
Increase/
(Decrease)
in Profit
After Tax
$’000
Increase/
(Decrease)
in Profit
After Tax
$’000
Effect on
Exchange Differences
on Translation of
Assets and Liabilities
of Foreign Operations
$’000
$’000
Strengthening of Sterling in US Dollar terms by 10c
Weakening of Sterling in US Dollar terms by 10c
Strengthening of Euro in US Dollar terms by 10c
Weakening of Euro in US Dollar terms by 10c
(33)
34
326
(325)
–––––––––
–––––––––
33
(33)
(10)
11
98
(98)
5
(7)
––––––––– –––––––––
––––––––– –––––––––
(172)
166
79
(85)
–––––––––
–––––––––
The company holds certain assets, mainly bank deposits, and liabilities denominated in the functional currencies of its
principal operating subsidiaries, which are the US Dollar, the Euro and Sterling. The following table shows the effects,
all other things being equal, of changes to exchange rates at the year-end on the profit after tax of the company. It is
based on the company’s assets and liabilities at the relevant balance sheet date.
FINANCIAL INFORMATION
55
2016
2017
Increase/(Decrease)
in Profit After Tax
$’000
$’000
Strengthening of Sterling in US Dollar terms by 10c
Weakening of Sterling in US Dollar terms by 10c
Strengthening of Euro in US Dollar terms by 10c
Weakening of Euro in US Dollar terms by 10c
29
(29)
71
(71)
(172)
172
53
(53)
––––––––– –––––––––
––––––––– –––––––––
f) Capital
The group considers its capital to comprise its share capital, its capital reserves (as set out in Note 24) and its retained
earnings. The group is not subject to any externally imposed capital requirements. In managing its capital, the group’s
primary objective is to support the development of the group’s activities through to the point where they are cash generative
on a sustained basis.
The group’s share capital is all equity capital and is summarized in Note 23.
2 3 . S H A R E C A P I TA L
Issued and Fully Paid
Ordinary shares of 20 pence each
2017
Number
2017
$’000
2016
Number
2016
$’000
7,361,365
9,999,378
––––––––– ––––––––– –––––––––
––––––––– ––––––––– –––––––––
3,079
2,375
–––––––––
–––––––––
Throughout the year, the company has had in issue one class of ordinary shares, which have at no time carried any right
to fixed income. During the year, 2,601,306 ordinary shares were issued in connection with the conversion of loan stock at
76.5p per share, (details of which are set out in Note 20) and 36,707 in connection with the exercise of options at exercise
prices ranging from 47.5p to 150p.
At 1 January 2017, the company had outstanding 25,138 warrants to subscribe for ordinary shares of 20p each at a price of
400p per share, which were issued in June 2007 to BlueCrest Capital Finance LLC in connection with the financing of the
acquisition of Alignent Software, Inc. The warrants, which had a ten-year life, expired unexercised in June 2017.
2 4 . C A P I TA L R E S E R V E S
Group
At 1 January 2016
Issues of shares
Recognition of share-based payments
Lapsing or expiry of share options
At 1 January 2017
Issues of shares
Recognition of share-based payments
Acquisition of shares by Esot
Lapsing or expiry of share options
Expiry of warrants to subscribe for shares
Transfer of embedded derivative on full conversion of
unsecured loan stock
At 31 December 2017
Share
Premium
$’000
Equity
Reserve
$’000
Special
Reserve
$’000
-
98
-
-
––––––––
98
1,986
-
-
-
-
678
-
62
(68)
––––––––
672
-
173
(29)
(20)
(70)
5,073
-
-
-
––––––––
5,073
-
-
-
-
-
Total
$’000
5,751
98
62
(68)
––––––––
5,843
1,986
173
(29)
(20)
(70)
-
––––––––
2,084
––––––––
––––––––
(163)
––––––––
563
––––––––
––––––––
-
––––––––
5,073
––––––––
––––––––
(163)
––––––––
7,720
––––––––
––––––––
56
FINANCIAL INFORMATION
Company
At 1 January 2016
Issues of shares
Recognition of share-based payments
Lapsing or expiry of share options
At 1 January 2017
Issues of shares
Recognition of share-based payments
Acquisition of shares by Esot
Lapsing or expiry of share options
Expiry of warrants to subscribe for shares
Transfer of embedded derivative on full conversion
of unsecured loan stock
At 31 December 2017
Share
Premium
$’000
Equity
Reserve
$’000
Special
Reserve
$’000
-
98
-
-
––––––––
98
1,986
-
-
-
-
678
-
62
(68)
––––––––
672
-
173
(29)
(20)
(70)
5,073
-
-
-
––––––––
5,073
-
-
-
-
-
Total
$’000
5,751
98
62
(68)
––––––––
5,843
1,986
173
(29)
(20)
(70)
-
––––––––
2,084
––––––––
––––––––
(163)
––––––––
563
––––––––
––––––––
-
––––––––
5,073
––––––––
––––––––
(163)
––––––––
7,720
––––––––
––––––––
The equity reserve comprises the fair value of share-based payments to employees pursuant to the group’s share
option schemes.
In addition, investment by the group’s employee share ownership trust (the “Esot”) in the company’s shares is deducted
from equity in the consolidated balance sheet as if they were treasury shares, by way of deduction from the equity
reserve. At 31 December 2017, the Esot held 36,472ordinary shares of 20p each in the company (2016: 14,250) which
represents 0.3 per cent (2016: 0.2 per cent) of the company’s ordinary share capital. The equity reserve includes a
deduction of $46,000 (2016: $17,000) which represents the cost of the shares held by the Esot at 31 December 2017.
The purpose of the Esot is to facilitate the company’s policy of offering participation in the ownership of its shares to
employees for reward and incentive purposes. At 31 December 2017 and at 31 December 2016, no shares held by the
Esot were under option or had been gifted to any employees. Arrangements for the distribution of benefits to employees
will be made at the Esot’s discretion in such manner as the Esot considers appropriate. Administration costs of the Esot
are accounted for in the profit and loss account of the company as they are incurred.
The special reserve is a non-distributable reserve arising from a capital reorganization in 2013, which may be used,
amongst other purposes as approved by the court, for the same purposes as if it were a share premium reserve.
2 5 . D I V I D E N D S
No dividends were paid during the year. The directors are proposing a final dividend of 2.5 pence per share in respect
of the year ended 31 December 2017 amounting to £250,000. This dividend has not been accrued in the consolidated
balance sheet as dividends are accounted for on a cash basis.
2 6 . R E T I R E M E N T B E N E F I T P L A N S
The group operates defined contribution retirement benefit plans which employees are entitled to join. The total
expense recognized in the income statement of $369,000 (2016: $269,000) represents contributions paid to such plans
at rates specified in the rules of the plans.
FINANCIAL INFORMATION
57
2 7 . R E L AT E D PA R T Y T R A N S A C T I O N S
Details of transactions between the group and related parties are disclosed below.
Compensation of Key Management Personnel
Details of directors’ remuneration are given in Note 7. The total remuneration of executive directors and members of the
group’s operating and executive management committees during the year was as follows:
Emoluments and benefits
Pension contributions
Share-based payments
2017
$’000
2016
$’000
2,523
58
98
–––––––
2,679
–––––––
–––––––
2,561
51
47
–––––––
2,659
–––––––
–––––––
Transactions with Related Parties who are Subsidiaries of the Company
The following is a summary of the transactions of the company with its subsidiaries during the year:
Net amounts repaid by subsidiaries in respect of interest-free loans
Net management charges to subsidiaries
2017
$’000
2016
$’000
(1,330)
674
–––––––
–––––––
(36)
556
–––––––
–––––––
The amounts owed by subsidiary companies to the parent company at 31 December 2017 totaled $52,345,000 (2016:
$48,386,000). An amount of, $4,664,000, due from the group’s US subsidiary companies, has been recognized in the
parent company balance sheet, the balance of amounts due from subsidiaries remaining subject to full provision. In 2016
full provision was made against the whole of such amounts due. Amounts owed by subsidiary companies to the parent
company are unsecured and are subordinated to the claims of all other creditors.
During 2017 and 2016, the company granted share options to employees of subsidiary companies. Details of grants of
share options are disclosed in Note 28.
Other Related Party Transactions
There were no other related party transactions during the year under review or the previous year.
2 8 . S H A R E - B A S E D PAY M E N T S
Equity-settled Share Option Schemes
The group has a number of share option schemes for all employees. Options are exercisable at a price equal to the market
price on the date of grant. The normal vesting periods are as set out below.
Vesting
Sopheon plc (USA) stock option plan
Sopheon UK approved share option scheme
Sopheon UK unapproved share option scheme
Sopheon NV share option scheme
In three equal tranches between the first and third anniversary of grant
On third anniversary of grant
Immediate or as per USA plan
Immediate or as per USA plan
58
FINANCIAL INFORMATION
Details of the share options outstanding during 2016 and 2017 are as follows:
Outstanding at 1 January 2016
Options granted in 2016
Options exercised in 2016
Options lapsed in 2016
Outstanding at 31 December 2016
Options granted in 2017
Options exercised in 2017
Options lapsed in 2017
Outstanding at 31 December 2017
Exercisable at 31 December 2017
Exercisable at 31 December 2016
Number of
Share
Options
Weighted
Average
Exercise
Price
£
622,170
0.99
91,189 0.88
1.19
(69,294)
0.97
(19,919)
–––––––––
624,146
163,900
(36,707)
–––––––––
0.95
4.68
0.73
(5,750) 4.14
–––––––––
1.76
–––––––––
–––––––––
0.94
–––––––––
–––––––––
0.99
–––––––––
–––––––––
520,114
–––––––––
745,589
–––––––––
–––––––––
544,000
–––––––––
–––––––––
–––––––––
–––––––––
During 2017, options were exercised over 36,707 ordinary shares at exercise prices ranging from 47.5p to 150p. During
2016, share options were exercised over 69,294 ordinary shares at exercise prices ranging from 55p to 175p. The
options outstanding at the end of the year have a weighted average contractual life of 6.4 years (2016: 6.2 years).
During the year share options were granted on 15 February 2017, when the exercise price of options granted was
467.5p and the estimated fair value was 276.8p. During the preceding year share options were granted on 8 April 2016,
when the exercise price of options granted was 87.5p and the estimated fair value was 51.8p.
The fair values for options granted are calculated using the binomial option-pricing model. The principal assumptions
used were:
Date of Grant
Share price at time of grant
Exercise price
Expected volatility
Risk-free rate
Expected dividend yield
February
2017
April
2016
467.5p
467.5p
40%
5%
Nil
87.5p
87.5p
40%
5%
Nil
The expected contractual life of the options used was ten years. Expected volatility was determined by reference to the
historic volatility of the company’s share price in the period before the date of grant.
D I R E C T O R S
Barry Mence, Chairman. Barry Mence has served as executive chairman and as a director and
substantial shareholder of Sopheon since its inception in 1993 when he was one of the founding
members. From 1976 to 1990, Barry was the major shareholder and group managing director of
the Rendeck Group of Companies, a software and services group based in the Netherlands.
Andrew Michuda, Chief Executive Officer. Andrew (Andy) Michuda was appointed chief
executive officer of Sopheon in 2000. From 1997 to 2000, he served as chief executive officer
and an executive director of Teltech Resource Network Corporation, which was acquired by
Sopheon. Prior to joining Sopheon, Andy held senior leadership positions at Control Data.
Arif Karimjee, ACA, Chief Financial Officer. Arif Karimjee joined Sopheon as chief financial
officer in 2000. Arif served as an auditor and consultant with Ernst & Young in the United
Kingdom and Belgium from 1988 until joining Sopheon.
Stuart Silcock, FCA, Non-Executive Director. Stuart Silcock has served as a director of Sopheon
since its inception in 1993 when he was one of the founding members of the company. Since
1982 Stuart has been a principal Partner in Lawford & Co chartered accountants. Stuart was
a non-executive director of Brown and Jackson plc for four years from 2001 and has held a
number of other directorships in the United Kingdom.
Daniel Metzger, Non-Executive Director. Dan Metzger was until 1998 Lawson Software’s EVP
Marketing, where he helped the company grow its revenues from $13m to $400m. Since then he
has held similar roles at Parametric Technologies, and also at auxilium and nQuire, subsequently
sold to Parametric and Siebel respectively. As a strategy consultant, Dan has helped numerous
technology companies reach and exceed their growth objectives. Dan is currently CEO of
Oppsource Inc.