2018 Annual Report
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Enterprise
Innovation
Management
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TABLE
OF
CONTENTS
STRATEGIC REPORT
Summary Results and Trends .............................................................................................5
Chairman's Statement .........................................................................................................6
Strategy and Market ............................................................................................................8
Financial Review ...............................................................................................................17
GOVERNANCE
Directors and Advisors ......................................................................................................22
Report on Directors' Remuneration ...................................................................................23
Directors' Report ................................................................................................................26
Statement of Directors' Responsibilities ............................................................................30
FINANCIAL INFORMATION
Auditors' Report .................................................................................................................31
Consolidated Financial Statements ...................................................................................37
Notes to the Financial Statements ....................................................................................41
Sopheon and Accolade are registered trademarks of Sopheon plc.
Stage-Gate® is a registered trademark of Stage-Gate 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 transformational change, enterprise innovation, product
development, 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
2017
2018
$33.9m
2017
2018
$6.4m
2018
2017
$15.0m
2016
$28.5m
2016
$5.1m
2016
$12.1m
2015
$20.9m
$23.2m
2015
$1.2m
$3.0m
2015
$8.2m
$9.9m
REVENUE
PROFIT BEFORE TAX
RECURRING REVENUE
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
6
CHAIRMAN'S
STATEMENT
I am pleased to report another year of solid strategic and financial progress for Sopheon.
In recent years I have described how we have broadened our mission from one that
helps R&D organizations to improve innovation, to one that helps major enterprises
achieve their strategic goals. This extension of our vision into what some are beginning
to call a third major pillar of the enterprise stack – alongside ERP and CRM – has
dramatically expanded our horizons and potential. In an increasingly digital world,
organizations are challenged to operate with more agility and velocity to survive and
thrive; this is where Sopheon can help and add significant value to our customers. The
potential addressable market for this opportunity is very substantial. Sopheon continues
to benefit from increased market recognition through industry business analyst leaders Gartner
and Forrester Research, having been named in 22 research reports in 2018.
While executing on our growth strategy we continued to strengthen our financial performance. Once again,
revenues, EBITDA1 and other profit measures in 2018 all exceeded market expectations, and resulted in two
upward revisions. Revenues rose to $33.9m from $28.5m in 2017. EBITDA reached $8.9m, up from $8m.
Substantial realignment of our debt position in 2017 has fed through into an even larger increase in profit before
tax, to $6.4m compared to $5.1m the year before. Our balance sheet is now very strong indeed, with net assets
rising to $25.6m from $18.6m the year before, and net cash rising to $16.7m from $9.5m; 100% of this growth
has been generated organically.
Our balance sheet is now very strong indeed, with net assets rising
to $25.6m from $18.6m the year before, and net cash rising to $16.7m
from $9.5m; 100% of this growth has been generated organically.
New customer acquisition increased by 39 percent, rising from 13 to 18 new license wins. At the same time, we
are proud of our very strong and increasingly enterprise-focused customer relationships – over two-thirds of our
annual revenues come from existing customers. Five of our new license deals were for software as a service
(SaaS) transactions. When combined with further increases in maintenance and hosting, this has led to Sopheon
closing the year with a total recurring revenue run rate of $15m, compared to $12m the year before. Together
with a solid backlog of services business coming out of 2018, coupled with a few early-reported sales in 2019,
current year revenue visibility2 now stands at $20.6m as compared to $19.3m at this time last year.
We continue to focus on and refine our three core growth strategies − to extend our footprint in existing
customers with an enterprise platform approach, to target new business with an unambiguously vertical focus,
and to develop a partnership ecosystem. These are described in more detail later in this statement. These core
strategies, along with our tremendous staff and unique culture, have been at the root of our consistent and solid
financial performance. In the context of financial performance, I want to come back to the theme of recurring
revenue. We are very proud of our strong customer relationships, repeat business and growing $15m recurring
revenue base. Approximately $3m of this is SaaS and hosting. Looking forward, our strong sales pipeline
includes a number of larger opportunities validating the strategic evolution I described earlier. As always with a
mostly perpetual, on-premise model, such deals can have a big revenue effect on the period in which they close.
STRATEGIC REPORT
7
However, as noted above, customer preference for perpetual rather than SaaS licensing in our market is beginning
to shift. With our balance sheet strong, we are assessing how to accelerate this migration to an even higher
recurring revenue model.
With a large diversified blue-chip client base, a comprehensive software platform and deep sector expertise, we
have a unique opportunity to advance our category leader status. Strategically, now is the time to accelerate
investment and solidify our leadership position. Once again, we have ambitious plans, many of which depend
on bringing in the right people in the coming year. Recent improvements to our hiring practices are leading to
rising traction with recruitment. Visibility already stands at $20.6m and our sales pipeline includes a number of
large opportunities; furthermore, in parallel with organic investments, we will continue to assess corporate paths
to accelerate our progress. In this respect, as well as driving partnerships and reassessing our SaaS strategy, we
remain open to M&A opportunities, provided they align with our strategic priorities.
I would like to close this statement by announcing a proposal to increase our dividend from 2.5p to 3.25p per share,
which we will put to shareholders at the next annual general meeting. I am delighted to be following through on
the commitment made last year to maintain a progressive dividend policy, which the board believes underlines our
maturity as a business.
Barry Mence
Executive Chairman
20 March 2019
2018
$25.6m
2017
$18.6m
2018
$16.7m
2017
$9.5m
NET ASSETS
NET CASH
100%
ORGANIC
GROWTH
1 EBITDA is defined and reconciled in Note 5 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.
8
8
STRATEGY
AND
MARKET
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.
OUR VISION
IS SOLID
LEARNINGS FROM 2018
1
2
3
A NEW & UNIQUE
DIFFERENTIATOR
EMERGED
ACCOLADE IS
AN ADAPTABLE
PLATFORM
Sopheon’s historical mission continues to be very
relevant to senior leadership and board level executives
in our target markets.
In 2018 we experienced market validation of Accolade’s
role as an enterprise platform. During the course of the
year we learned that our Accolade platform is used as
a solution for 14 different business applications, each
offering a distinct value proposition. Most are tangential
to our foundational solution – automation of the product
development process.
There is an emerging expectation from the market that
enterprise-class software, historically viewed as complex
and hard to use, should appear simple to users of the
software while still delivering robust scalability and granular
security models. As we continued to deepen partnerships
with our enterprise-scale customers, we learned repeatedly
that we are meeting this expectation – Accolade, while
a very advanced offering satisfying the IT architecture,
governance and complex access control needs of global
companies, is at the same time providing a consumer-
grade user experience for the users of the software.
We believe we are unique in this in our space, and are
committed to continuing our journey to lead in the evolution
of the modern, easy-to-use enterprise software.
STRATEGIC REPORT
STRATEGIC REPORT
9
9
BEYOND
PRODUCT TO
MISSION CRITICAL
NEW CLIENT
ACQUISITION IS
SCALABLE
INNOVATION
ECOSYSTEMS
ARE MATURING
4
5
6
Last year we took a big step towards one of our
strategic goals, namely extending our value proposition
from a “product-centric” solution to digitalizing the
corporate strategies that are responsible for driving
our clients’ future success. We learned that a number
of clients have begun to use Accolade to improve
alignment, visibility and transparency between corporate
strategic initiatives and the operational execution
activities that are responsible for initiative success.
This extension of our software has been the result
of a natural pull by our clients to turn Accolade into a
more strategic enterprise platform; we will embrace
this movement and invest to make Accolade a mission-
critical enterprise pillar.
We also proved we can increase new client acquisition
through more targeted marketing and additional
investment into sales efforts. The 39 percent rise in new
client acquisition is also a sign of business momentum,
market reputation and growing market need.
Lastly, we witnessed a shift in the desire by our clients
to use Accolade as a shared innovation platform across
an ecosystem of innovators working together towards
a common business goal. We are very much on the
front end of understanding how Accolade can operate
as a common governance system for business partner
ecosystems. Last year we had a number of our clients
who are part of one another’s ecosystem ask us to
facilitate workshop activities to collaborate around this
topic. While too early to determine what direction this
will take, it is firmly on our roadmap for discovery and
we will watch this space closely for opportunities to
expand our offering and lead the market further.
"It was critical that the Enterprise Innovation Management
software solution we selected be easy to use, have the depth
of functionality to fulfil our emerging business requirements,
and be accessible in a modular, scalable format. Sopheon’s
Accolade fulfilled these requirements in full."
Head of
Innovations at
a large dairy
foods company
10
STRATEGIC REPORT
MARKET OPPORTUNITIES
CONTINUED
INDUSTRY
FOCUS
1
We continued to concentrate on our core industries with
the objective of growing market share where we hold
preferred positions due to strong core competency in
our product, best-practice content and expertise of our
people. I am proud to share that 100% of our 2018 Net
New sales came from our target verticals, proof of our
team’s dedication to executing on our strategy.
In parallel, we are exploring additional industries for
expansion. On the back of the success in signing
market leader Denso and others in 2018, we will
be investing in targeted marketing programs to the
Automotive & Transportation sector in the coming years.
Food & Beverage
Aerospace & Defense
Chemicals
Automotive
High-Tech Electronics
Consumer Goods
Industrial Manufacturing
TAPPING INTO
DIGITAL TRANS-
FORMATION
2
Research1 shows that over 40% of today’s companies
on the S&P 500 will no longer exist within 10 years
due to their inability to operate with agility and speed
in today’s hyper paced changing markets. Executing
on digital transformation strategies and initiatives
is becoming an imperative for these organizations.
This new emerging market represents considerable
addressable target market size as a subset of the
overall digital transformation market, estimated at
$445 billion.
Many companies suffer from operating with outdated
and “disconnected” tools in a market that is moving
faster than they are, putting them at risk of finding
1 John M. Olin School of Business
themselves on the wrong side of what research refers
to as a growing digital divide separating winners and
losers.
Sopheon believes companies cannot implement
strategic changes or pivots with speed – an ability
required to win in today’s fast-paced economy
– without “connecting” strategic initiatives with
operational work activities. We see this as a unique
opportunity for Sopheon to digitalize corporate
strategic initiatives, innovation investments and
portfolios in a single platform creating a digital
operating model designed to navigate the new world
order of digital disruption.
Accolade digitalizes this emerging operating model
enabling a CEO to achieve his or her strategic
direction with a velocity that cannot be accomplished
without the support of an enterprise innovation
management platform.
STRATEGIC REPORT
11
Sopheon customers report the following value from digitalizing their innovation processes with Accolade:
^ 75%
15-30%
50%
10-20%
Increase
Portfolio Value
by 75-100%
Reduce
Time to Market
by 15-30%
Increase
Product/Initiative
Success
by up to 50%
Reduce
Costs
by 10-20%
3
CLIENT
PARTNERSHIP
EXPANSION
For many years Sopheon has aspired to work with the
most successful innovators in the world. Today we are
extremely proud − and fortunate − to have earned the
trust to conduct business with many admired global
brand leaders. While our clients have played an
instrumental role in shaping our product roadmap in
the past, we believe there is mutual benefit to be had
from investing in stronger and deeper relationships.
For example, we are engaging strategically with clients
in the creation of our top two new product innovations
currently in concept development. We are excited to
explore further opportunities to innovate in partnership
with our clients in creating solutions that bring value to
both parties.
Companies must create three new operational competencies
powered through digitalization to win in the digital age
Global
Digitization
Power of the
Consumer
Annual planning
must be dynamic
and iterative
Strategic initiatives
must be realized at
a higher rate
Cross-functional
teamwork must be
“connected”
12
STRATEGIC REPORT
CONTINUED MARKET MOMENTUM
AND VALIDATION
Throughout 2018 Sopheon reported continued market momentum in a number of areas; it is precisely this
momentum that gives us confidence and optimism for the future.
Product Competency Drives Business Expansion
We continue to leverage our strength in product development process automation that underpinned our initial
product offering when Sopheon was established. We have since expanded our specialization to the portfolio
management market and have more recently stepped into a broader enterprise solution to support the execution
of corporate strategy. We are unique in our ability to link corporate strategic initiatives with operational execution
activity for transparency and visibility. It is this ability, in combination with Accolade’s deepening capabilities with
each product release in curating data, managing business processes, and providing insights and reporting, that
has our clients increasingly describing Accolade as being a mission critical system for them.
Accolade decision support has expanded from product development to mission-critical strategic planning and execution.
Increased Market Coverage by Business Analysts
Sopheon continued to enjoy increased coverage in industry
research by respected business analysts, with mentions in 22
reports in 2018. We were recognized in five of Gartner’s Market
Guides for strategy and innovation markets, as well as its Magic
Quadrant for Project Portfolio Management; on the back of
being named a Leader in the Forrester Wave™ for Strategic
Portfolio Management in 2017, we continue to be named in
research reports by Forrester Research in the strategic portfolio
management arena. We are experiencing a clear correlation
between this coverage and increased inbound demand for our
solutions from prospects via our website and other venues.
30
20
10
0
2016
2017
2018
Research coverage by Gartner & Forrester
continues to grow.
Category of Data ManagedContinuous Planning & Business Improvement Product Development•Reporting•Process•Cross-Functional Work ActivityOperational Portfolios Management•Initiatives•Sustainability•Cost Programs•CAPEX•IP Management•Enterprise Objectives•BU•Sector•Geo•Program•ProductCorporate Strategy Execution•Objectives•Investment Buckets•Roadmaps•Global/Local Governance STRATEGIC REPORT
13
"The enhancements in Accolade … will help us navigate
change more effectively as an organization, and
streamline our daily work so we can move the business
forward more quickly."
Richard Herd
Director of Program
Management Tools,
Strategy & Deployment
Honeywell
Product Uptake and Satisfaction by Clients
Migration to current releases is strong
Our clients have become familiar with Sopheon’s release cadence and a strong majority – over
85% – have upgraded to a supported release of Sopheon to take advantage of new functionality
and capabilities.
Customer support metrics improve
Our Support Services organization continues to improve on customer service delivery as we grow.
Performance indicators including response time, time to resolution and number of closed tickets all
improved last year in spite of higher volumes of support cases from a growing client base.
Strongest client retention in company history
Our client retention rate continued to display an upward trend, reaching 97 percent (up from
95 percent in 2017). This is an indicator of higher adoption and perceived value by our clients.
WORLD-
CLASS
98%
97%
95
94
94
93
91
91
89
85
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
World-class retention is in our sights.
14
STRATEGIC REPORT
WHAT MAKES
SOPHEON DIFFERENT
Our Culture
As a company, and as individuals, we value integrity, honesty, openness, personal excellence, continual self-
improvement, and mutual respect. These core values contribute to a culture that sets us apart. At a time when
technology companies are experiencing unprecedented turnover, instill Sopheon is proud of our employee retention of
over 90 percent. The large number of employees whose tenure is 10 years or longer contributes in a unique and critical
way to instilling our cultural values into the mentoring of new Sopheonites as they undergo onboarding. In a recent
independent consultant study evaluating Sopheon internal processes and culture, employees shared the following:
“The work is challenging…
it doesn’t get dull!”
“We’re always upgrading
[technologically] and
playing with new tools.”
“It’s truly a team, you have
a voice and are heard.”
“[Sopheon is] the most
flexible and open company
I’ve worked for.”
“As long as your work gets
done, you have autonomy
and flexibility.”
“Good people who are energetic
and good to be around.”
Our People
Innovation Specialists with Deep Experience Working with World Leaders
We have long-term partnerships with some of the most admired innovators and domain experts in the world. This
has provided us the opportunity to learn, invest and continue to serve the needs of such market leaders. It is this
foundational expertise that has differentiated Sopheon from others in the market.
Our clients tell us our people are caring, give them high marks for domain knowledge and commitment to their success.
• “Sopheon set itself apart with the promise of best-practice content embedded in its software to guide us in defining
our new processes, and its knowledgeable and highly responsive team.” (Endress+Hauser)
• “We have found in Sopheon a professional, trustworthy and flexible partner who not only met the regulatory
requirements for hosting our sensitive project data, but proved to have a deep understanding of our business needs
and processes." (innoEnergy)
• “You both have been extremely engaging and proactive in improving our environment.” (Fortune 500 consumer
goods firm)
As we continue to grow and expand our teams, we are taking measures to infuse both our culture and our domain
experience into how we work. We have kicked off a structured Value Assurance Approach (VAA) program, “packaging”
best practices from client engagements into our consulting methodology. The VAA will introduce new efficiencies and
time to value for our clients by leveraging accumulated learnings from working with clients. The VAA will enable all new
Sopheonites to learn more quickly from our historical experience and impart that knowledge to our growing client base.
STRATEGIC REPORT
15
Our Product
Sopheon’s product team has moved our product forward greatly, updating legacy technology while making
strategic advancements that will provide market differentiation well into the future. Our solution is unique in its
end-to-end support of the innovation lifecycle, and its configurability that enables support for such a broad range
of tangential business processes and use cases. We continue to maintain a regular release cadence, with the
following releases in 2018:
1. Accolade 12.0, released in March 2018, provided deeper connection and transparency between decision
making and knowledge work, making it easier and quicker to make the best decisions and get work done
and helping organization to be more agile and adaptable in a hyper-competitive market.
across multiple projects. This feature falls right in line with Afton’s efforts to continuously
improve business processes by saving our global business managers valuable time when
“ The new Accolade 12.0 release will give us the ability to quickly reassign resources
managing their new product development project portfolios.”
– Randy Franklin,
Business Systems Specialist at Afton Chemical Corporation
2. Accolade 12.1, released in August 2018, boosted time-to-insights and reporting efficiencies.
“ Parker has chosen to take advantage of Accolade’s great new capabilities in navigating
and visualizing key metrics around portfolio management. These drive the best possible
clarity for our key business segments across the corporate hierarchy as they make strategic
investment decisions. We find the ability to model and evaluate various portfolio scenarios
to be particularly compelling, supporting our efforts to implement the optimal mix of
investment vs. reward and overall alignment to goals.”
– Bill Beane,
Senior Director of Corporate Technology Ventures
& Innovation Systems, Parker Hannifin
Our Clients
Blue-Chip Customer Base
Sopheon is extremely proud of the quality of our blue-chip customer base. Legendary brands to join the Sopheon
fold during 2018 include The Nature’s Bounty Company, The Hershey Company and Doosan Bobcat. These
market leaders provide a strong revenue stream from ongoing maintenance renewals, plus the nature of the
relationships offers huge potential for expanding our user base and application of our software into new areas of
their business. The power of this customer base is made apparent by the number of new prospects proactively
reaching out to Sopheon based on a referral from an existing Accolade user or when Accolade users change roles
or change jobs and introduce us into their new company.
Stronger Together
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. This value is shared by
longstanding clients and new clients coming into the Sopheon network alike.
16
STRATEGIC REPORT
GROWTH
STRATEGY
We are confident that our fundamental corporate Mission, Vision and Strategy have us on the right path for
continued success. Our growth strategy has not wavered, and we continue to be focused on the same four
cornerstones that have delivered our recent growth:
1. Leverage blue chip references to extend Accolade as the digital platform of choice to digitalize
corporate strategy and operational execution. Sopheon’s roster of customer 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.
We believe our Accolade platform extension strategy represents a significant growth opportunity. In addition,
the pace of technology 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 the future.
2. Generate faster Net New logo 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. We will continue to focus our efforts on dominating
our chosen core vertical markets 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 our exploration in
the automotive and transportation industry provided favorable results leading to the addition of this vertical as
a core industry in which we will invest to gain market share. We will continue to explore additional verticals
in 2019.
3. Multiply our growth through developing and monetizing an Accolade ecosystem of distribution
partnerships – channel, strategic and geographical. Our ecosystem has 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. Last year we produced new sales through partnership with both management consulting
companies as well as further development of our emerging reseller network. Our partner development
strategy calls for several varieties of partners, 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.
4. Engage in M&A only if it propels the speed and competency for Sopheon to achieve 1, 2 or 3 above.
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 and signed on its behalf by:
Andy Michuda
CEO
20 March 2019
17
FINANCIAL
REVIEW
In this report, our CFO Arif Karimjee provides further analysis of Sopheon’s financial results
during 2018, our financial position at the end of the year, and an overview of key corporate
developments.
Trading Performance
In 2018 we reported a 19 percent increase in consolidated turnover to $33.9m, up from
$28.5m in 2017. Around half of the rise can be attributed to software related revenues –
licenses and maintenance – with the other half being service related, being implementations and
hosting. With respect to the license activity, larger deal size was the key driver of the increase, with a total license
transaction count including extension orders of 57 compared to 59 in 2017. This is good evidence of our migration
towards more enterprise deals, given that 2017 had already benefited from two very substantial sales. Underlining
the increasingly enterprise-oriented nature of our business, it is striking that over the past five years 31 customers
have each delivered over $1m in revenue to Sopheon.
Of the 57 transactions last year 18 were new customers, a 39% increase over the 13 booked in 2017. Both
maintenance and services rose well, driven by delivery both of the business sold in the preceding year and
new deals signed in 2018. Our services revenues now exceed $10m revenue, a milestone for any consultancy
business. Our hosting revenues showed particular strength as further detailed below. A breakdown of revenue in
each year is given in Note 4 of the financial statements.
It has become typical in our business to have a very strong fourth quarter, which can lead to a lot of activity
at the end of the year. However, in 2018 we were fortunate in having a number of substantial transactions
complete at the end of the third quarter and accordingly this proved to be our strongest quarter last year. The
overall calendarization pattern broadly held in 2018, with the second half of the year accounting for 53 percent of
revenues (2017: 55 percent and 2016: 51 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 factor to bear in mind while we continue to operate with a largely perpetual license model – something we are
looking at strategically as noted in the Chairman’s Statement. The seasonal profile of our services business is less
predictable as it is linked to timing of preceding license sales and the individual scale of implementation projects,
which can vary tremendously depending on the maturity of each customer. Maintenance and hosting revenue
elements are more evenly spread as would be expected from their accounting treatment.
Of the 57 transactions last year 18 were new customers, a 39% increase
over the 13 booked in 2017. Both maintenance and services rose well,
driven by delivery both of the business sold in the preceding year and
new deals signed in 2018. Our services revenues now exceed $10m
revenue, a milestone for any consultancy business.
18
STRATEGIC REPORT
2017 featured a particularly strong year for our European business, with almost 39 percent of total revenues.
As detailed in Note 3, both the Americas and Europe grew revenues further in 2018 – indicative of the rising
momentum across our developed markets – but the emphasis shifted back to North America somewhat at 64
percent (2017: 61 percent).
Coming into 2019 and following some early sales bookings at the start of the year, revenue visibility for the year
already stands at $20.6m compared to $19.3m at this time a year ago.
Gross margin was 71 percent, compared to 73 percent in 2017 but ahead of the 70 percent achieved in 2016.
Both 2018 and 2016 had greater services intensity, which can have a small impact on margins; costs of the
professional services organization are included in costs of sales, alongside the costs of our hosting activities,
license royalties for OEM partners and certain indirect taxes. We expanded services resources again last year,
as well as adding new leadership, resulting in higher payroll and subcontracting costs in this area. We believe
that a strong services capability is also key to long-term success and win rate, and we will continue to recruit
in this area as the business expands while also ensuring that we make limited use of flexible subcontracted
resources as appropriate.
Recurring Revenue
As noted in the Chairman’s Statement we recognize that recurring revenue is both fundamental to our long-
term growth and important to the investor community, and we are actively considering ways to further enhance
the recurring profile of the business. The group’s base of recurring business rose to $15m at the end of 2018,
compared to $12m the year before. Maintenance alone has a run rate of $12m, with an additional $1.5m each in
hosting services and Software as a Service (SaaS) subscriptions. The majority of our license revenue continues
to remain perpetual in nature, but we continue to see growing interest in SaaS options. During 2018 we signed
five new SaaS deals compared to three the year before, demonstrating growing traction in this important area
of corporate development. 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 infrastructure to ensure this service
remains an attractive proposition. Over a quarter of our active perpetual customers are hosted by Sopheon.
Overall retention of recurring revenue increased to 97 percent by value (2017: 95 percent). In this regard
we continue to invest in customer satisfaction programs alongside regular service and account management
processes to maximize value for our customers.
We recognize that recurring revenue is both fundamental to our
long-term growth and important to the investor community, and we are
actively considering ways to further enhance the recurring profile of
the business. The group’s base of recurring business rose to $15m at
the end of 2018, compared to $12m the year before.
Complementing our focus on recurring revenue, our strong customer relationships are key to the stability and
potential of our business as we extend our footprint in each customer in line with our strategic goals described in
the Strategy and Market Review above. In this respect I have already commented on the increasingly enterprise-
oriented nature of our business leading to serious revenue generation from a wide range of customers; also of
note is the fact that 73 percent of our revenues were from existing customers last year (2017: 69 percent).
STRATEGIC REPORT
19
Research and Development Expenditure
Overall expenditure in product development increased by approximately $0.9m to $5.5m in 2018. These
amounts can be compared to the headline research and development reported in the income statement showing
an increase from $4.3m to $5.1m; 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 – an expansion we first started in
2017. We had in fact decided to accelerate hiring in this area in 2018; as noted elsewhere there is a tight market
in particular for US software engineers. Accordingly our costs in this area were somewhat lower than expected,
contributing to the strong profit performance in the year. We have modified our recruitment practices in this area
and are now seeing rising traction with bringing on new skilled people. Overall, the amount of 2018 research
and development expenditure that met the criteria of IAS38 for capitalization was $2.6m (2017: $2.5m) offset
by amortization charges of $2.2m (2016: $2.2m). These capitalized costs are largely attributable to the group’s
investment in the Accolade 12.0, 12.1, and 12.2 releases.
Other Operating Costs
Like any other software and services business, over three quarters of Sopheon’s costs are payroll and related
costs. Sopheon has a relatively mature and highly qualified blend of staff, reflecting the professional and
intellectual demands of our chosen market. Furthermore, we have made a strategic decision to onshore
our development team, as we believe that until a certain scale is reached, the cost benefits of offshoring are
outweighed by management and productivity concerns. Our focus remains on securing the right mix of people
rather than targeting a headcount number; however, as revenue growth has progressed, since 2016 we have
steadily expanded staffing, ending 2018 with 147 staff. As indicated above, we had intended to accelerate
recruitment last year, and we continue to target a large number of hires into 2019 to support the growth and
strategic trajectory of the business.
The average headcount during 2018 was 142, compared to 125 the year before, leading to higher overall wage
costs as reported in Note 7 of the financial statements. Payroll costs also include 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 and is paid in 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 $0.8m. Most of this increase was attributable
to additional staff, with a third linked to higher commission and incentive payments linked to higher revenue. As
with other areas, we are looking to expand these teams further during 2019.
Headline administration costs have risen by approximately $0.6m. This area includes all other overheads, office
costs, regulatory and compliance costs, and depreciation – several of which expanded to keep pace with our
growth. It also includes 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 in 2016,
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.
20
STRATEGIC REPORT
Results
EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) is a key indicator of the underlying
performance of our business, commonly used in the technology sector. EBITDA is further defined and reconciled
to profit before tax in Note 5. The combined effect of the revenue and cost performance discussed above has
resulted in Sopheon’s EBITDA performance for 2018 rising strongly again, to $8.9m, from $8.0m in 2017 and
$5.6m in 2016.
As further described below, during the year the group had facilities with Silicon Valley Bank but these were largely
undrawn, resulting in a low finance expense compared to previous years. In previous years the group had
convertible unsecured loan stock, which was converted into equity in December 2017, a transaction that included
a compensatory payment of interest resulting in a total interest charge in 2017 of $0.5m compared to $0.1m
in 2018. Furthermore, as dollar interest rates started to rise we were able to capture around $0.1m of interest
income in 2018 compared to a negligible amount the year before. These positive changes in the funding structure
of the business means that profit before tax has shown an even stronger improvement year on year, coming in at
$6.4m (2017: $5.1m).
Positive changes in the funding structure of the business means that
profit before tax has shown an even stronger improvement year on
year, coming in at $6.4m (2017: $5.1m).
The net tax credit of $0.5m (2017: $0.2m) reported in the income statement is made up of three elements. First,
although Sopheon benefits from accumulated tax losses in a number of jurisdictions this is not universal and
accordingly a current tax charge of approximately $0.2m was incurred in 2018 (2017: $0.4m) of which a third
arose in Germany and the balance were state taxes in the United States. Second, due to the rising profit trend
of the group, in 2016 we started recognition of the substantial deferred tax asset owned by the business and, as
further detailed in Note 10, we have extended the scope of that recognition in subsequent years. This resulted
in added recognition of a further $0.5m (2017: $0.7m) in 2018, of a total potential asset of approximately $13m.
Finally, following reforms of the corporate alternative minimum tax (AMT) regime in the USA, the group is entitled
to a refund of AMT paid in previous years leading to recognition of a $0.2m credit.
Altogether, this leads to a profit after tax rising to $6.9m (2017: $5.4m). Profit per ordinary share on a fully diluted
basis has also risen to 65 cents (2017: 56 cents).
Dividend
Following another successful year, the board is pleased to continue Sopheon’s progressive dividend policy and
proposes a dividend of 3.25p pence per share for the year ended 31 December 2018 (2017: 2.5p). Subject to
approval by the company’s shareholders at the annual general meeting scheduled for 13 June 2019, the dividend
will be paid on 12 July 2019 with an ex-dividend date of 13 June 2019.
Following another successful year, the board is pleased to continue
Sopheon’s progressive dividend policy and proposes a dividend of
3.25 pence per share for the year ended 31 December 2018 (2017: 2.5p).
STRATEGIC REPORT
21
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 April
this year, with renewal being negotiated as we go to press. Both facilities bear interest at rates of 2.75 percent
over the Wall Street Prime rate, resulting in a current effective rate of 8.25 percent, rates that are expected
to improve substantially upon renewal. The facilities, drawdown mechanics and interest rates are subject to
covenants based on 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, which had
been due to mature on 31 January 2019, was in fact fully converted the end of 2017, resulting in the issue of
approximately 2.5m new Ordinary Shares. This change improved the profile of the group’s balance sheet and
simplified the capital structure, as well as eliminating a major element of our interest charges.
Consolidated net assets at the end of the year stood at $25.6m
(2017: $18.6m), an increase of $7m. Around $5.5m of this increase is
attributable to an improvement in the net current asset position, on
the back of another year of strong operational performance.
Intangible assets stood at $6.2m (2017: $5.8m) at the end of the year. This includes (i) $5.2m being the net
book value of capitalized research and development (2017: $4.8m) and (ii) an additional $1.0m (2017: $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 $0.5m at the end of the year (2017: $0.4m).
Consolidated net assets at the end of the year stood at $25.6m (2017: $18.6m), an increase of $7m. Around
$5.5m 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 $0.2m relates to the elimination of long-term debt, $0.7m
to the increased recognition of the deferred tax asset and AMT credit, 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 2018 amounted to $17.1m (2017: $12.7m). Approximately $7.4m was held in US Dollars, $8.0m
in Euros and $1.7m in Sterling. Net cash, stated after subtracting debt, rose from $9.5m the previous year to
$16.7m at the end of 2018.
Approved by the board and signed on its behalf by:
Arif Karimjee
CFO
20 March 2019
22
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
23
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
2018
$
Bonus
2018
$
Benefits
2018
$
Total
2018
$
Total
2017
$
205,599
320,525
196,306
96,871
155,015
74,648
7,118
11,916
4,967
309,588
487,456
275,921
296,592
471,703
243,302
33,992
33,992
-
-
-
-
33,992
33,992
30,458
30,458
790,414
326,534
24,001
1,140,949
1,072,513
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 2017 and 2018 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 2018 contributions of $9,331, $4,527 and $9,175 (2017: $9,073, $7,956 and $8,058) were paid
respectively to the pension schemes of B.K. Mence, A.L. Michuda and A. Karimjee.
24
GOVERNANCE
Performance Graph
The following graph shows the company’s share price performance on AIM since January 2014, 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.
16
14
12
10
8
6
4
2
0
Sopheon
Share Price
AIM All-Share
Rebase
Jan 2014
July 2014
Jan 2015
July 2015
Jan 2016
July 2016
Jan 2017
July 2017
Jan 2018
July 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:
At 31 December
B.K. Mence
A.L. Michuda
A. Karimjee
S.A. Silcock
D. Metzger
Share Options
Ordinary Shares
2018
2017
2018
2017
24,250
290,000
85,000
-
-
24,250
240,000
75,000
-
-
2,228,537
84,155
82,493
520,318
5,000
2,294,927
88,823
85,294
541,064
5,000
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 15,575, 8,875 and 32,493 ordinary shares each. An additional 11,250 of the ordinary shares
disclosed for S.A. Silcock are held as trustee or executor for family members. Accordingly, the personal interest of
B.K. Mence is in 2,212,962, S.A. Silcock in 500,193 and A. Karimjee in 50,000 ordinary shares.
GOVERNANCE
25
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
2017
Granted
During
Year
Expired
During
Year
At 31
December
2018
B.K. Mence
B.K. Mence
A.L. Michuda
A.L. Michuda
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
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
11 February 2018
4 July 2018
27 August 2010
29 September 2012
5 December 2013
8 April 2016
15 February 2017
11 February 2018
4 July 2018
105p
85p
150p
105p
85p
87.5p
467.5p
565p
900p
150p
105p
85p
87.5p
467.5p
565p
900p
6,125
18,125
12,500
138,380
49,000
15,120
25,000
-
-
7,500
23,125
26,875
5,850
11,650
-
-
-
-
-
-
-
-
-
50,000
50,000
-
-
-
-
-
15,000
15,000
-
-
(12,500)
(37,500)
-
-
-
-
-
-
(20,000)
-
-
-
-
-
6,125
18,125
-
100,880
49,000
15,120
25,000
50,000
50,000
7,500
3,125
26,875
5,850
11,650
15,000
15,000
Vesting of all of the above share options which were outstanding at 31 December 2018 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 2018 was 1190p. During the financial year
the mid-market price of Sopheon ordinary shares ranged from 362p to 1370p. 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 and signed on its behalf by:
Arif Karimjee
Director
20 March 2019
26
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 approximately two-thirds of the group’s revenues and staff are based in the
United States, 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 2018 of 3.25 pence per share (2017: 2.5 pence per share),
amounting to £330,000 (2017: £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 maintaining high standards of corporate governance. Following recent changes to
AIM Rule 26, AIM quoted companies are required to adopt and give details of the corporate governance code which they
have adopted and to show how they are following it. With effect from 28 September 2018, the board has adopted the
Quoted Companies Alliance’s (QCA) Corporate Governance Code for small and mid-size quoted companies (the “QCA
Code”).
Of the recognized codes generally adhered to by AIM companies, the QCA Code has been drafted with smaller
businesses in mind, with a pragmatic and principles-based approach. It was therefore deemed by the board to be the
most suitable.
The board had already in 2017 established an internal project to update its internal risk management procedures with a
new enterprise risk framework based on the provisions proposed by COSO (Committee of Sponsoring Organizations of
the Treadway Commission) with a view to incorporating a formal risk review agenda point in each board meeting. The
adoption of the QCA Code has reinforced the underpinnings for this project and key principles of the Code have been
incorporated into the risk management process. In addition, the adoption of the QCA Code has resulted in the board
preparing new terms of reference for its two key board committees (the Audit Committee and the Remuneration and
Appointments Committees) as well as a new schedule of matters reserved for the board of directors.
Solid corporate governance is the foundation on which the business is managed and this is supported by the range
of talents of the directors. Biographies of the directors appear inside the back cover, and demonstrate a range of
experience and caliber to bring the right level of independent judgment to Sopheon’s business. Ensuring financial
strength alongside growth objectives is a key guiding principle, supported by an effort to ensure solid communication with
shareholders.
The chairman is responsible for leading the board and for its overall effectiveness in directing the group, and for ensuring
that the board implements, maintains and communicates effective corporate governance processes and for promoting a
culture of openness and debate designed to foster a positive governance culture throughout the group.
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 2018, all directors attended all
quarterly meetings either in person or by conference call.
The QCA Code, which was revised in April 2018 to meet the new AIM requirements, identifies ten principles that focus
on the pursuit of medium- to long-term value for shareholders without stifling entrepreneurial spirit. Sopheon’s adoption
of the QCA principles is summarized in the table below. Further details are made available on our website.
GOVERNANCE
27
QCA Principle
Sopheon Adoption
1. Establish a strategy
and business model
which promote
long-term value for
shareholders
Sopheon’s mission is to help our customers achieve exceptional long-term growth
and profitability through sustainable innovation. Our guiding philosophy is to balance
aggressive growth strategies with a focus on profitability, while also ensuring long-term
financial stability. We believe the combination of these three factors will maximize long-
term value for shareholders. Full information on the group’s strategy and business model
can be found in the Strategic Report on pages 6 to 21.
2. Seek to understand
and meet shareholder
needs and expectations
The board engages with shareholders and the broader investment community via
a variety of channels and activities including the annual general meeting, updates
to shareholders via reporting and the regulatory news service, and institutional
presentations. The Chairman and CFO are the primary contacts for investor interaction
alongside finnCap, with the CEO ensuring availability to meet investors when visiting
Europe from his US base.
3. Take into account wider
stakeholder and social
responsibilities and
their implications for
long-term success
Sopheon’s culture is very open and this includes reaching out and seeking feedback
and insights from our various stakeholders. In addition to the investor outreach
described above, key practical elements of this philosophy for other stakeholders
include having a flat organization with few tiers of management; meeting regularly;
all-hands communications via web-meetings; customer engagement through account
management, satisfaction surveys and user forum events; and broader market
engagement through close relationships with sector analysts such as Gartner and
Forrester Research.
4. Embed effective
risk management,
considering both
opportunities and
threats, throughout
the organization
The board is responsible for identifying the major business risks faced by the group and
for determining the appropriate course of action to manage those risks. In 2018 the board
adopted a framework for the effective identification, assessment and management of risks
to the achievement of corporate objectives. The risk management process is managed
in Accolade and is embedded in our quarterly meeting cycle. The risks that the board
considers to be principal risks to the group’s business are set out on page 28.
5. Maintain the board
as a well-functioning,
balanced team led by
the chair
The QCA Code requires that boards have an appropriate balance between executive
and non-executive directors and that each board should have at least two independent
directors. The board is made up of three executive directors and two non-executive
directors. The two non-executive directors are mature, experienced and independent
persons who have each succeeded in their own businesses and are not dependent upon
income from the group. They have developed a strong and detailed understanding of the
business, and are prepared and able to intervene and challenge the executive directors.
6. Ensure that between
them the directors have
the necessary up-to-
date experience, skills
and capabilities
Details of the background and experience of the directors of the company are set out
inside the back cover of this report. These demonstrate that our team collectively has the
necessary skills and experiences, as well as the required caliber, to carry out the group’s
strategy and business model effectively. With regard to the non-executive directors,
one is a financial specialist and the other is an industry specialist, and both have prior
experience of working in a public company environment. Furthermore, one is America
based and the other Europe based, reflecting the geographical footprint of the group.
7. Evaluate board
performance
based on clear and
relevant objectives,
seeking continuous
improvement
A board self-evaluation process led by the chairman took place in July 2018, using a
QCA-sponsored questionnaire and process. Low scoring or divergent scoring responses
were then discussed, with gaps and actions for improvement identified. This was the first
such formal process and the board has agreed that this should be an annual event.
8. Promote a corporate
culture that is based
on ethical values and
behaviors
Sopheon’s core values statement and guiding principles, developed by the extended
management team, support the group’s culture with a strong footing in ethical values.
These are reinforced in the staff handbook and the staff appraisal and development
process, which formally embeds cultural and ethical considerations as part of each
employee’s self-evaluation.
9. Maintain governance
structures and
processes that are
fit for purpose and
support good decision-
making by the board
10. Communicate how the
company is governed
and is performing by
maintaining a dialog
with shareholders
and other relevant
stakeholders
Formal board meetings are held quarterly to review strategy, management, and
performance of the group, with additional meetings between those dates convened as
necessary. We have two board committees, the Audit Committee and the Remuneration
and Appointments Committee. The terms of reference of both these committees of the
board have been revised to reflect the principles of the QCA Code and are available online.
The group’s approach to investor and shareholder engagement is described under
Principle 2 above. Annual reports, Annual General Meeting notices, regulatory
announcements, trading updates and other governance related materials since the year
2000 are available from the group’s website.
28
GOVERNANCE
Post Balance Sheet Events
There are no post balance sheet events that warrant disclosure in the financial statements.
Research and Development
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.
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.
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.
GOVERNANCE
29
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 20 March 2019 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
Ordinary Shares
% Issued
Ordinary Shares
2,428,711
2,228,537
520,318
23.9
22.0
5.1
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 20 March 2019 and signed on its behalf by:
A. Karimjee
Director
30
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
31
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 2018 which comprise the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated and company statements of financial position, the consolidated and company
cash flow statements, the consolidated and company statements of changes in equity, and notes to the financial
statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in 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 2018 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by
the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the
financial statements section of our report. We are independent of the group and the parent company in accordance with
the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical
Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that 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.
32
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Key audit matter
How we addressed the key audit matter in the audit
Revenue Recognition
See accounting policy in Note 2 on page 41 and
Revenue from contracts with customers in Note 4
on page 48.
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 a key code
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, in particular the unbundling of any
contracts in line with the performance obligations,
and that the policy itself is not in accordance with
IFRS as adopted by the European Union.
Further in line with IFRS 15 there is a risk
that accounts receivable and deferred income
are shown gross in the financial statements
where there is not an unconditional right to
consideration.
For these reasons revenue recognition is
considered to be a key audit matter.
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 procedures that are performed
around revenue.
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
and implementation 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 consideration given to IFRS 15.
For each of the three revenue streams, licenses,
maintenance and service revenues, we selected a
sample of key contracts entered into during the year for
testing, with particular emphasis over large customers
and those entered into during Q4. 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 and that delivery of the Accolade license key
was delivered before the year-end, and therefore
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.
We ensured that of the small, yet growing number of
software as a service (SaaS) contracts supplied by the
group where Sopheon hosts the offering, a sample of
contracts was obtained, and the revenue recognition, to
recognize the revenue over the lifetime of the contract,
was confirmed as appropriate.
Finally, our procedures, in relation to IFRS 15, also
considered the presentation of trade receivable
and contract liabilities to ensure that both balances
reflect the required presentation position. This being
the earlier of either, the date the payment becomes
due (i.e. when the ‘receivable’ is recognized), or the
date the goods or services are delivered (i.e. when a
‘contract asset’ is recognized).
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
33
Key audit
How we addressed the key audit matter in the audit
Capitalized Development Costs
See accounting policy in Note 2 and intangible
assets Note 14 on pages 41 and 55 respectively.
The group capitalizes costs in relation to the
development of the software provided to its
clients, being the Accolade platform.
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.
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
Development costs not satisfying the above
criteria and expenditure on the research phase
of internal projects are recognized in the income
statement as incurred.
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. Further, a risk exists
that assets not available for use have not been
impaired as required.
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.
We considered whether the development costs
capitalized met the criteria for capitalization under IAS
38 and subsequently whether the mechanics over
capturing time spent and translating that cost into an
accounting entry operated accurately, utilizing the
underlying timecard information, the underlying hours
and cost were agreed back through to the timecard
system.
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 by
reviewing the underlying timecard information and
the ability for the asset to generate future economic
benefits for the business by analyzing the percentage
of customers who upgrade to the latest version on
release.
For each intangible asset sampled all inputs were
agreed back to supporting documentation ensuring
the existence and accuracy 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.
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. There were no instances where this was
an issue in the year.
34
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 $341,000 (2017: $285,000) which
represents 1 percent of revenue (2017: 1 percent of revenue). Performance materiality was set at 70 percent (2017:
70 percent) of this due to the fact that there are multiple components within the group, whilst the group has a good
control environment and a low history of misstatements. Materiality for the parent was set at 90 percent of group
materiality, being $307,000. We agreed with the audit committee that we would report to them misstatements identified
during our audit above $17,000 (2017: $14,000). Finally, component materiality was set at 75 percent of group
materiality, at $254,000 (2017: $209,000).
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 into 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 full scope audits, 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.
Revenue has been tested in detail across each entity within the group, regardless of the level of audit 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 92 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%
8%
Net
assets
92%
Full audit scope
Review at group level
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
35
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 30, 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.
36
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Auditor’s Responsibilities for the Audit of the Financial Statements
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.
Use of our Report
This report is made solely to the parent 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 parent 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 parent company and the parent
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Iain Henderson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
55 Baker Street
London W1U 7EU
United Kingdom
20 March 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
FINANCIAL INFORMATION
37
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 8
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
3, 4
2018
$’000
2017
$’000
33,922
(9,916)
28,534
(7,591)
24,006
20,943
(8,552)
(5,078)
(3,995)
(7,730)
(4,266)
(3,350)
6,381
5,597
8
9
102
(77)
6
(468)
6,406
5,135
10
514
243
5
6,920
5,378
12
12
68.60c
71.92c
64.98c
55.92c
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 8
Profit for the year
Other comprehensive expense
Exchange differences on translation of foreign operations
Total comprehensive income for the year
2018
$’000
6,920
2017
$’000
5,378
(314)
31
6,606
5,409
38
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 8
Assets
Non-current Assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Deferred tax asset
Other receivables
Group
Company
Notes
2018
$’000
2017
$’000
2018
$’000
2017
$’000
13
14
15
10
16
532
6,206
-
2,557
227
417
5,821
-
2,010
19
-
-
7,814
-
5,793
-
-
8,268
-
4,664
Total non-current assets
9,522
8,267
13,607
12,932
Current Assets
Trade and other receivables
Cash and cash equivalents
17
18
13,997
17,086
15,387
12,729
96
3,076
Total current assets
31,083
28,116
3,172
96
1,492
1,588
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
Total equity
40,605
36,383
16,779
14,520
19
20
4
20
5,621
355
9,035
6,239
3,171
8,345
15,011
17,755
-
-
28
28
518
-
-
518
-
-
862
-
-
862
-
-
15,011
17,783
518
862
25,594
18,600
16,261
13,658
23
24
3,118
8,277
50
14,149
3,079
7,720
364
7,437
3,118
8,277
(2,159)
7,025
3,079
7,720
(1,380)
4,239
25,594
18,600
16,261
13,658
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 2018 was $2,994,000 (2017: profit of $4,199,000).
Approved by the board and authorized for issue on 20 March 2019.
Barry K. Mence
Director
Arif Karimjee
Director
FINANCIAL INFORMATION
39
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 8
Group
Company
Notes
2018
$’000
2017
$’000
2018
$’000
2017
$’000
Operating Activities
Profit for the year
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
Tax refundable in future years
8
9
13
14
Operating cash flows before movements in working capital
Intra-group credits and charges
Decrease in provisions against intra-group loans
Decrease/(increase) in receivables
(Decrease)/increase in payables
6,920
5,378
2,994
4,199
(102)
77
297
2,230
512
(547)
(208)
9,179
-
-
1,175
318
(6)
468
206
2,167
173
(672)
-
7,714
-
-
(5,289)
3,241
-
4
-
-
512
-
-
3,510
(713)
(3,775)
-
344
-
402
-
-
173
-
-
4,774
(674)
(5,060)
(51)
136
Net cash generated from/(used in) operating activities
10,672
5,666
(634)
(875)
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
8
13
14
102
(420)
(2,615)
-
-
6
(367)
(2,519)
-
-
-
-
-
(1,484)
3,866
-
-
-
(446)
1,776
Net cash (used in)/generated from investing activities
(2,933)
(2,880)
2,382
1,330
Financing Activities
Issues of shares
Repayment of borrowings
Decrease in line of credit
Interest paid
Dividends paid
213
(170)
(2,674)
(77)
(337)
20
25
34
(168)
-
(261)
-
213
-
-
(4)
(337)
Net cash used in financing activities
(3,045)
(395)
(128)
Net increase in cash and cash equivalents
4,694
2,391
1,620
34
-
(192)
-
(158)
297
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
12,729
(337)
10,061
277
1,492
(36)
1,197
(2)
Cash and cash equivalents at the end of the year
18
17,086
12,729
3,076
1,492
40
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 8
Group
Share
Capital
$’000
Capital Translation
Reserve
$’000
Reserves
$’000
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 1 January 2018
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 and warrants
Dividends paid in year
2,375
-
5,843
-
-
-
704
-
-
-
-
3,079
-
-
-
39
-
-
-
-
-
1,986
173
(29)
(90)
(163)
7,720
-
-
-
174
512
(129)
-
Retained
Profits/
(Losses)
$’000
1,806
5,378
Total
$’000
10,357
5,378
-
31
5,378
5,409
-
-
-
90
163
2,690
173
(29)
-
-
333
-
31
31
-
-
-
-
-
364
-
7,437
6,920
18,600
6,920
(314)
-
(314)
(314)
6,920
6,606
-
-
-
-
-
-
129
(337)
213
512
-
(337)
At 31 December 2018
3,118
8,277
50
14,149
25,594
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 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
2,375
-
704
-
-
-
-
At 1 January 2018
Profit and total comprehensive income for the year
Issues of shares
Recognition of share-based payments
Lapse or exercise of share options and warrants
Dividends paid in year
3,079
-
39
-
-
-
5,843
-
1,986
173
(29)
(90)
(163)
7,720
-
174
512
(129)
-
(2,199)
819
-
-
-
-
-
(1,380)
(779)
-
-
-
-
(213)
4,199
-
-
-
90
163
4,239
2,994
-
-
129
(337)
Total
$’000
5,806
5,018
2,690
173
(29)
-
-
13,658
2,215
213
512
-
(337)
At 31 December 2018
3,118
8,277
(2,159)
7,025
16,261
FINANCIAL INFORMATION
41
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 22. 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.
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 impacts of IFRS 9 and IFRS 15,
and the expected impact of IFRS 16, are described under the 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 1.2769 US Dollars to British Pounds Sterling as at 31 December 2018 and 1.3330 US Dollars to British
Pounds Sterling as the average rate prevailing during 2018.
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. 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.
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.
There have been no business combinations in the period covered by this report.
42
FINANCIAL INFORMATION
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, is effective for periods commencing on or after 1 January 2018 and
supersedes the previous revenue recognition guidance including IAS 18 Revenue and related interpretations. 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 consider that these
performance obligations are satisfied over time and that the methods previously used to measure progress continue to be
appropriate. These are separate distinct performance obligations within each contract.
In view of the above, the application of IFRS 15 has not had a significant effect on the reported financial performance of the
group. However, certain classification requirements of the standard have had an impact on the classification of receivables
and payables as contract assets and contract liabilities, as further detailed in Note 4.
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.
FINANCIAL INFORMATION
43
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
such leases on its 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 2018 operating lease commitments amounted to $1,536,000. 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 expense.
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.
44
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
45
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.
Financial Instruments
Impact of IFRS 9
IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018 and has been applied
in the financial statements in respect of the current year. The adoption of this standard has had no significant impact
on the group’s statements of financial position and equity.
1. Financial Assets
Financial assets do not include prepayments. Management determines the classification of financial assets at initial
recognition.
Amortized Cost
These assets arise principally from the provision of goods and services to customers (e.g. trade receivables), but also
incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual
cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognized at
fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried
at amortized cost using the effective interest rate method, less provision for impairment.
Impairment provisions for current and non-current trade receivables are recognized based on the simplified approach
within IFRS 9 using the lifetime expected credit losses. During this process the probability of the non-payment of
the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from
default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are
reported net, such provisions are recorded in a separate provision account with the loss being recognized within cost
of sales in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be
collectable, the gross carrying value of the asset is written off against the associated provision.
Financial assets held at amortized cost comprise trade and other receivables, and cash and cash equivalents in the
consolidated statements of financial position.
The comparatives included within the annual report are prepared under IAS 39. Consequently in the prior year the
financial assets are classified as 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 or services (e.g. trade receivables) but also include cash and cash equivalents and other types of contractual
monetary assets. 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.
Further, in the prior year 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 provision.
46
FINANCIAL INFORMATION
2. Financial Liabilities
The group classifies its financial liabilities in the category of financial liabilities at amortized cost. All financial liabilities
are recognized in the statement of financial position when the company becomes a party to the contractual provision or
the instrument.
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, 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.
3. 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 the sales contract involves multiple service obligations the allocation of the transaction price is performed
proportionally based on the standalone selling price for each obligation. The way in which management assigns the
selling price to each separate performance obligation is based on the cost of satisfying the performance obligation plus
an appropriate margin.
FINANCIAL INFORMATION
47
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 2018 and 2017 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 2018
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 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
North
America
$’000
Europe
$’000
Total
$’000
21,614
6,068
6,100
102
(70)
(2,464)
5,273
272
2,615
26,246
(10,041)
North
America
$’000
17,274
5,133
5,077
6
(62)
(2,326)
7,459
254
2,519
25,902
(12,217)
12,308
313
306
-
(7)
(63)
3,600
148
-
14,359
(4,970)
33,922
6,381
6,406
102
(77)
(2,527)
8,873
420
2,615
40,605
(15,011)
Europe
$’000
Total
$’000
11,260
464
58
-
(406)
(47)
511
112
-
10,481
(5,566)
28,534
5,597
5,135
6
(468)
(2,373)
7,970
366
2,519
36,383
(17,783)
One customer, located in North America, accounted for approximately 11 percent of the group’s revenues in 2018.
Another customer, also located in North America, accounted for approximately 7 percent of the group’s revenues in
2017.
Revenues attributable to customers in North America in 2018 amounted to $20,985,000 (2017: $16,697,000). Revenue
attributable to customers in the rest of the world amounted to $12,937,000 (2017: $11,837,000) of which $11,555,000
(2017: $11,038,000) was attributable to customers in Europe.
48
FINANCIAL INFORMATION
4 . R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S
Disaggregation of Revenue
Revenue attributable to each of the group’s primary geographic markets is analyzed in Note 3 above. The following table
provides further disaggregation of revenue in accordance with the IFRS9 requirement to depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors.
Software licenses and subscriptions
Consulting and implementation services
Maintenance
Hosting
Contract Balances
2018
$’000
10,391
10,771
10,822
1,938
2017
$’000
9,332
8,869
9,159
1,175
33,922
28,534
Contract assets and contract liabilities are included within “Trade and other receivables” and “Deferred revenue”
respectively on the face of the statement of financial position. They arise because cumulative payments received from
customers at each balance sheet date do not necessarily equal the amount of revenue recognized on the contracts.
At 1 January 2018
Transfers in the period from contract assets to trade receivables
Revenue recognized ahead of cash (or rights to cash)
Transfers in the period from contract liabilities to revenue
Cash (or rights to cash) received in advance of revenue recognition
At 31 December 2018
Contract
Assets
$’000
Contract
Liabilities
$’000
382
(382)
1,109
-
-
8,345
-
-
(8,345)
9,035
1,109
9,035
The increase in contract assets is largely attributable to invoicing terms relating to three substantial contracts where
delivery has occurred or work has been performed ahead of invoicing milestones. The group has taken advantage of
the relief in IFRS 15 to reflect in the current year the aggregate effect of all modifications that occur in the year before
adoption. The impact of adoption at 31 December 2018 has been to reduce accounts receivable by $469,000 of advance
billings relating to certain implementation and consultancy services, with a corresponding reduction in deferred revenue.
There was no impact on revenue recognition.
FINANCIAL INFORMATION
49
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
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
2018
$’000
(31)
2,848
2,230
297
598
96
2017
$’000
(6)
2,099
2,167
206
562
103
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.
The directors consider that EBITDA, which is defined as earnings before interest, tax, depreciation and amortization, is
also an important profit 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
Write-back of investment provision
Amortization of intangible assets
Depreciation of property, plant and equipment
EBITDA
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
2018
$’000
2017
$’000
6,406
5,135
77
(102)
(35)
2,230
297
468
(6)
-
2,167
206
8,873
7,970
2018
$’000
2017
$’000
68
5
16
-
22
64
5
16
13
14
50
FINANCIAL INFORMATION
7 . S TA F F C O S T S
Wages and salaries
Social security costs
Pension contributions
Employee benefits expense
2018
$’000
17,181
1,388
419
942
2017
$’000
14,439
1,171
369
823
19,930
16,802
Included within the above are staff costs capitalized as development expenditure amounting to $2,615,000 (2017: $2,519,000).
Included within wages and salaries are bonus and sales commission costs amounting to $3,027,000 (2017: $2,538,000).
The average monthly number of employees during the year was made up as follows:
Development and operations
Sales and management
2018
Number
2017
Number
97
45
142
83
42
125
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
2018
$’000
1,141
23
1,164
2017
$’000
1,073
25
1,098
During the year 70,000 share options (2017: Nil) were exercised by directors, details of which are set out in the Report on
Directors’ Remuneration on page 23. Pension contributions are to personal defined contribution schemes and have been
made for three directors (2017: three) who served during the year.
Full details of directors’ remuneration are disclosed in the Report on Directors’ Remuneration on page 23.
Staff costs in the parent company amounted to $602,000 including bonuses (2017: $585,000). The average monthly
number of staff of the parent company during the year included one full time and two part time (2017: one and two).
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
2018
$’000
2017
$’000
102
6
FINANCIAL INFORMATION
51
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
2018
$’000
2017
$’000
(77)
(468)
Included in interest expense in 2017 is interest on the group’s 8% Convertible Lon Stock amounting to $399,000,
including a one-off payment of $201,000 to holders in recognition of the loss of their interest and repayment rights as a
result of the early conversion of the whole of the loan stock into ordinary shares in December 2017.
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% (2017: 19.25%)
Adjustment for differing rates of corporate taxation in overseas jurisdictions
Tax effect of expenses that are not deductible in determining taxable profits
Temporary differences arising from the capitalization
and transfer of development investments
Utilization of prior year losses
Current tax expense for the year
US Alternative Minimum Tax refundable
Recognition of deferred tax asset
Total income tax credit for the year
2018
$’000
514
2017
$’000
243
2018
$’000
6,406
(1,217)
(401)
(154)
56
1,476
2017
$’000
5,135
(988)
(168)
(76)
70
733
(240)
(429)
208
547
514
-
672
243
The current tax expense represents German corporation tax payable by Sopheon GmbH and US state taxes payable
by the group’s US subsidiaries.
US corporate Alternative Minimum Tax (AMT) has been repealed in respect of tax years beginning on or after 1 January
2018. AMT paid by US corporations in respect of periods prior to that date will be refundable over a four year period to
December 2021.
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.
52
FINANCIAL INFORMATION
Deferred Tax Asset
The group has a potential deferred tax asset arising from its unrelieved trading losses, which has been partially
recognized, 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 2018
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 2018
2018
$’000
547
2017
$’000
672
2,557
2,010
2018
$’000
144
2017
$’000
114
(1,072)
8,189
(1,010)
10,943
7,261
10,047
At 31 December 2018, tax losses estimated at $53m (2017: $63m) 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 $2.6m (2017: $2.0m)
and a further potential deferred tax asset of $8.2m (2017: $10.9m), based on the tax rates currently applicable in the
relevant tax jurisdictions.
Of these tax losses, an aggregate amount of $8.8m, representing $1.9m of the potential deferred tax asset (2017: $9.0m
and $1.9m 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 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 2018 was
$2,994,000 (2017: profit of $4,199,000). The parent company’s result includes the partial recognition amounting
to $1,130,000 (2017: $4,664,000) of long-term loans due to the parent company from subsidiary companies, which
previously had been subject to full provision, together with a release of $2,645,000 (2017: $397,000) of the amount
of such provision. Advantage has been taken of Section 408 of the Companies Act 2006 not to present an income
statement for the parent company.
FINANCIAL INFORMATION
53
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
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
Diluted earnings per share
2018
$’000
2017
$’000
6,920
5,378
’000s
’000s
10,088
7,478
68.60c
71.92c
’000s
’000s
6,920
-
6,920
5,378
399
5,777
’000s
’000s
10,649
10,331
64.98c
55.92c
For the purpose of calculating the diluted earnings per ordinary share in 2018 and 2017, in respect of the outstanding
875,821 share options (details of which are set out in Note 28), the treasury stock method is used. This assumes
that options to subscribe for Sopheon shares at prices below the average share price prevailing during the year are
exercised on 1st January of the relevant year (or, if later, on the date of grant) and that the proceeds from exercise of
such options are reinvested in treasury shares at the average price prevailing during the year.
For the purpose of calculating the diluted earnings per ordinary share in 2017, the profit attributable to ordinary
shareholders is also adjusted on the assumption that the group’s convertible loan stock was converted into ordinary
shares at 1st January in that year.
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 whole of the outstanding stock in December 2017. No convertible loan stock was outstanding
during 2018.
54
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 2017
Additions
Exchange differences
At 1 January 2018
Additions
Exchange differences
At 31 December 2018
Accumulated Depreciation
At 1 January 2017
Depreciation charge for the year
Exchange differences
At 1 January 2018
Depreciation charge for the year
Exchange differences
At 31 December 2018
Carrying Amount
At 31 December 2018
Computer
Equipment
$’000
Furniture
& Fittings
$’000
2,108
286
30
2,424
299
(17)
2,706
1,877
183
24
2,084
264
(13)
2,335
363
81
19
463
121
(7)
577
353
23
10
386
33
(3)
416
Total
$’000
2,471
367
49
2,887
420
(24)
3,283
2,230
206
34
2,470
297
(16)
2,751
371
161
532
At 31 December 2017
340
77
417
Company
The company has no property, plant and equipment.
1 4 . I N TA N G I B L E A S S E T S
Cost
At 1 January 2017
Additions (internally generated)
At 1 January 2018
Additions (internally generated)
At 31 December 2018
Amortization
At 1 January 2017
Charge for the year
At 1 January 2018
Charge for the year
At 31 December 2018
Carrying Amount
At 31 December 2018
At 31 December 2017
FINANCIAL INFORMATION
55
Development
Costs
(Internally
Generated)
$’000
Goodwill
$’000
Total
$’000
21,646
2,519
24,165
2,615
1,022
-
1,022
-
22,668
2,519
25,187
2,615
26,780
1,022
27,802
17,199
2,167
19,366
2,230
21,596
-
-
-
-
-
17,199
2,167
19,366
2,230
21,596
5,184
1,022
6,206
4,799
1,022
5,821
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 (2017: 3 percent). The discount rate used was 9 percent (2017:
14.6 percent). Sensitivity analysis performed on these projections demonstrates significant valuation headroom above the
carrying value of goodwill.
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 2017
Exchange difference
At 31 December 2018
Company
$’000
8,268
(454)
7,814
Details of the company’s subsidiaries at 31 December 2018 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.
56
FINANCIAL INFORMATION
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
57
1 6 . O T H E R R E C E I VA B L E S
Other receivables
Tax refundable in future years
Amounts due from subsidiary undertakings
(net of provisions)
Group
Company
2018
$’000
2017
$’000
2018
$’000
19
208
-
227
19
-
-
19
-
-
5,793
5,793
2017
$’000
-
-
4,664
4,664
The other receivable represents a deposit paid in respect of a property leased by the group.
The tax refundable represents US Alternative Minimum Tax, further details of which appear in Note 10.
A partial provision of $41,315,000 (2017: $47,681,000) has been made against amounts totaling $47,108,000 (2017:
$52,345,000) 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.
The expected credit loss provision against amounts due to the parent company from subsidiary undertakings has been
assessed using a Stage 3 approach as detailed below.
At 31 December 2017
Net repayments
Net management charges
Release of provision
Exchange adjustments
At 31 December 2018
Company
$'000
47,681
(2,382)
713
(1,129)
(3,568)
41,315
58
FINANCIAL INFORMATION
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
2018
$’000
12,014
56
12,070
818
1,109
2017
$’000
14,205
57
14,262
743
382
13,997
15,387
2018
$’000
2017
$’000
-
77
77
19
-
96
-
81
81
15
-
96
The carrying value of trade and other receivables classified at amortized cost approximates fair value.
Trade receivables amounting to $408,000 (2017: $3,750,000) were pledged to Silicon Valley Bank as collateral to
secure borrowings against the group’s revolving line of credit (see Note 20).
The group has adopted the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected
credit loss provision for trade receivables and contract assets. As further detailed in Note 22, the group’s customers
almost exclusively comprise major international corporations of good credit standing mostly based in the USA and
the EU, and the group’s historical credit loss experience is negligible. Accordingly, the trade receivables and contract
assets are assessed as homogenous for the purposes of grouping for credit risk, and expected loss rate is expected to
be nil leading to no provision for impairment being recorded.
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
2018
$’000
9,208
7,878
2017
$’000
3,977
8,752
2018
$’000
3,076
-
17,086
12,729
3,076
2017
$’000
1,492
-
1,492
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 $64,000 (2017: $33,000) held by the group’s employee share
ownership trust.
FINANCIAL INFORMATION
59
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
2018
$’000
636
471
1,104
3,410
2017
$’000
1,126
373
1,148
3,592
5,621
6,239
2018
$’000
2017
$’000
51
120
-
347
518
71
135
-
656
862
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)
Total non-current loans and borrowings
Group
Company
2018
$’000
326
29
355
-
-
2017
$’000
3,000
171
3,171
28
28
2018
$’000
2017
$’000
-
-
-
-
-
-
-
-
-
-
-
-
Total loans and borrowings
355
3,199
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
2017
$’000
3,000
199
Cash
Flows
$’000
(2,674)
(170)
Total loans and borrowings
3,199
(2,834)
Settled
Through
Equity
$’000
-
-
-
2018
$’000
326
29
355
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.
60
FINANCIAL INFORMATION
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
2018
$’000
584
793
Other
2018
$’000
88
71
Land &
Buildings
2017
$’000
542
1,348
1,377
159
1,890
Other
2017
$’000
105
164
269
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.
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
Group
Company
Notes
2018
$’000
2017
$’000
17
17
16
17
18
12,014
56
-
1,109
17,086
14,205
57
-
743
12,729
2018
$’000
-
77
5,793
-
3,076
2017
$’000
-
81
4,664
-
1,492
30,265
27,734
8,965
6,237
Non-current Financial Assets
Other receivables
16
227
19
-
-
The group does not have any financial assets in any other categories.
FINANCIAL INFORMATION
61
2. Financial Liabilities
Current Financial Liabilities
Trade payables
Other payables
Accruals
Loans and borrowings
Non-current Financial Liabilities
Loans and borrowings
Notes
19
19
19
20
20
Group
Company
2018
$’000
636
471
3,410
355
2017
$’000
1,126
373
3,592
3,171
4,872
8,262
-
-
28
28
2018
$’000
2017
$’000
51
120
347
-
518
-
-
71
135
656
-
862
-
-
4,872
8,290
518
862
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:
62
FINANCIAL INFORMATION
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 negligible. 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 2018, the largest single customer accounted for 11 percent of
group revenues (2017: 7 percent of group revenues in respect of a different 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.
A feature of recent years is that major corporations have slowed down payments or insist on long credit terms, and this
is reflected in the ageing profile of the group’s receivables. However, as noted above the group’s bad debts experience
is negligible. Impairments that do arise are not 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 contractually enforceable, but to derecognize
revenue if collection is uncertain.
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 2018
12,014
10,004
1,568
443
At 31 December 2017
14,205
12,293
1,114
798
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:
Trade receivables
North America
Europe
$’000
Gross
Value
8,544
3,470
12,014
2018
$’000
Provision
-
-
-
$’000
Carrying
Value
8,544
3,470
$’000
Gross
Value
9,010
5,195
12,014
14,205
2017
$’000
Provision
$’000
Carrying
Value
-
-
-
9,010
5,195
14,205
The group records impairment losses on its trade receivables separately from the gross amounts receivable. No
impairment losses were recorded during 2018 or 2017. 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.
FINANCIAL INFORMATION
63
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.
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 2018
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Total financial liabilities
At 31 December 2017
On Demand
or Within
Six Months
$’000
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
1,107
326
29
-
1,462
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
On Demand
or Within
Six Months
$’000
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Future interest – convertible loan stock
Total financial liabilities
1,499
3,000
86
5
210
4,800
-
-
86
3
-
89
-
-
28
-
-
28
-
-
-
-
-
-
Company
At 31 December 2018
On Demand
or Within
Six Months
$’000
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
Trade and other payables
Total financial liabilities
171
171
-
-
-
-
-
-
At 31 December 2017
On Demand
or Within
Six Months
$’000
Within
One Year
$’000
Within
Two Years
$’000
Within
Five Years
$’000
Trade and other payables
Future interest – convertible loan stock
Total financial liabilities
206
210
416
-
-
-
-
-
-
-
-
-
Total
$’000
1,107
326
29
-
1,462
Total
$’000
1,499
3,000
200
8
210
4,917
Total
$’000
171
171
Total
$’000
206
210
416
64
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
$29,000 at 31 December 2018. This liability does not give rise to interest rate risk. The group also has a revolving US
Dollar line of credit, on which $326,000 in aggregate was outstanding at 31 December 2018, and which bears interest
at a margin of 2.75 percent above the WSJ Prime Rate, currently representing an effective rate of 8.25 percent. Should
this rate have increased by 1 percent the annualized effect would have been to increase finance costs by $3,000.
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 2018 was $7,878,000. During 2018
interest rates on money market deposits averaged at or below 0.5 percent in respect of Euro and Sterling deposits
and at around 2 percent in respect of US Dollar 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 $39,000.
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.
2018
2017
2018
2017
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
9
(10)
275
(275) (325)
(33)
34
326
194
(194)
268
(270)
98
(98)
5
(7)
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
FINANCIAL INFORMATION
65
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.
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
f) Capital
2018
2017
Increase/(Decrease)
in Profit After Tax
$’000
$’000
123
(123)
103
(103)
29
(29)
71
(71)
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
2018
Number
2018
$’000
2017
Number
Ordinary shares of 20 pence each
10,143,766
3,118
9,999,378
2017
$’000
3,079
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, 144,388 ordinary shares were issued in connection with the exercise of options at exercise
prices ranging from 55p to 565p.
66
FINANCIAL INFORMATION
2 4 . C A P I TA L R E S E R V E S
Group
Share
Premium
$’000
Equity
Reserve
$’000
Special
Reserve
$’000
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 1 January 2018
Issues of shares
Recognition of share-based payments
Lapsing or expiry of share options
At 31 December 2018
Company
98
1,986
-
-
-
-
-
2,084
174
-
-
2,258
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 1 January 2018
Issues of shares
Recognition of share-based payments
Lapsing or expiry of share options
At 31 December 2018
98
1,986
-
-
-
-
-
2,084
174
-
-
2,258
946
5,073
8,277
Total
$’000
5,843
1,986
173
(29)
(20)
(70)
5,073
-
-
-
-
-
-
(163)
5,073
-
-
-
7,720
174
512
(129)
Total
$’000
5,843
1,986
173
(29)
(20)
(70)
5,073
-
-
-
-
-
-
(163)
5,073
-
-
-
7,720
174
512
(129)
672
-
173
(29)
(20)
(70)
(163)
563
-
512
(129)
672
-
173
(29)
(20)
(70)
(163)
563
-
512
(129)
946
5,073
8,277
Share
Premium
$’000
Equity
Reserve
$’000
Special
Reserve
$’000
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 2018, the Esot held 36,472 ordinary shares of 20p each in the company (2017: 36,472)
which represents 0.4 percent (2017: 0.3 percent) of the company’s ordinary share capital. The equity reserve includes
a deduction of $46,000 (2017: $46,000) which represents the cost of the shares held by the Esot at 31 December 2018.
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 2018 and at 31 December 2017, 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.
FINANCIAL INFORMATION
67
2 5 . D I V I D E N D S
Dividends paid in year
Final dividend for 2017 of 2.5p per share paid in July 2018
2018
$’000
2017
$’000
337
-
The directors are proposing a final dividend of 3.25 pence per share in respect of the year ended 31 December 2018
amounting to £330,000 ($421,000).
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 $419,000 (2017: $369,000) represents contributions paid to such plans
at rates specified in the rules of the plans.
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
2018
$’000
2,957
62
369
2017
$’000
2,523
58
98
3,388
2,679
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
Net management charges to subsidiaries
2018
$’000
(2,382)
713
2017
$’000
(1,330)
674
The amounts owed by subsidiary companies to the parent company at 31 December 2018 totaled $47,108,000 (2017:
$52,345,000). An amount of, $5,793,000 (2017: $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. Amounts owed by subsidiary companies to the parent company are unsecured and are subordinated to
the claims of all other creditors.
During 2018 and 2017, 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.
68
FINANCIAL INFORMATION
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
Details of the share options outstanding during 2017 and 2018 are as follows:
Outstanding at 1 January 2017
Options granted in 2017
Options exercised in 2017
Options lapsed in 2017
Outstanding at 31 December 2017
Options granted in 2018
Options exercised in 2018
Options lapsed in 2018
Outstanding at 31 December 2018
Exercisable at 31 December 2018
Number of
Share
Options
Weighted
Average
Exercise
Price
£
624,146
163,900
(36,707)
0.95
4.68
0.73
(5,750) 4.14
745,589
288,278
1.76
7.03
(144,388) 1.09
3.69
(13,658)
875,821
585,264
3.57
2.19
Exercisable at 31 December 2017
544,000
0.94
During 2018, options were exercised over 288,278 ordinary shares at exercise prices ranging from 55p to 565p. During
2017, share options were exercised over 36,707 ordinary shares at exercise prices ranging from 47.5p to 150p. The
options outstanding at the end of the year have a weighted average contractual life of 6.8 years (2017: 6.4 years).
During the year share options were granted on 11 February 2018, when the exercise price of options granted was 565p
and the estimated fair value was 334.5p and on 4 July 2018, when the exercise price of options granted was 900p and
the estimated fair value was 532.9p. During the preceding 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.
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
July
2018
900p
900p
40%
5%
0.3%
February
2018
February
2017
565p
565p
40%
5%
0.4%
467.5p
467.5p
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.
69
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.