CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

	Share capital		Share premium	Merger reserve		Shares based payment reserve		Translation reserve		Retained earnings		Total  equity
	£000		£000	£000		£000		£000		£000		£000
Balance as at 1 January 2020	1,662		13,135	2,432		654		82		(1,166)		16,799
Profit for the year	-		-	-		-		-		2,274		2,274
Other comprehensive (expense)/income for the year	-		-	-		-		10		(1,697)		(1,687)
	_______		_______	_______		_______		_______		_______		_______
Total comprehensive income	-	-		-		-		10		577		587
Shares issued	386	15,037		-		-		-		-		15,423
Share based payment Reserve transfer on lapse of share options Reserve transfer on exercise of share options	-   -   -	-   -   -		-   -   -		427   (65)   (86)		-   -   -		-   65   86		427   -   -
Balance as at 31 December 2020	2,048	28,172		2,432		930		92		(438)		33,236
Profit for the year	-	-		-		-		-		1,678		1,678
Other comprehensive income/(expense) for the year	-	-		-		-		(294)		1,235		941
Total comprehensive (expense)/income	-	-		-		-		(294)		2,913		2,619
Shares issued	171	19		9,672		-		-		-		9,862
Share based payment	-	-		-		1,061		-		-		1,061
Deferred tax on share options	-	-		-		528		-		-		528
Nil cost option charge	-	-		-	(5)		-		-		(5)
Reserve transfer on lapse of share options	-	-		-		(25)		-		25		-
Reserve transfer on exercise of share options	-	-		-		(195)		-		195		-
Balance as at 31 December 2021	2,219	28,191		12,104		2,294		(202)		2,695		47,301

 

 

 

 

 

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1             GENERAL INFORMATION

The principal activity and nature of operations of the Group is the provision of world class IT solutions to the life sciences market. Instem's solutions for data collection, management and analysis are used by customers worldwide to meet the needs of life science and healthcare organisations for data-driven decision making leading to safer, more effective products. Instem plc is a public limited company, listed on AIM, and incorporated in England and Wales under the Companies Act 2006 and domiciled in England and Wales. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD.

 

BASIS OF PREPARATION

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements for the years ended 31 December 2021 or 2020 as defined in section 435 of the Companies Act 2006 (CA 2006). The financial information for the year ended 31 December 2021 has been extracted from the Group's unaudited financial statements. Statutory financial statements for 2020 have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

 

The Group's accounting reference date is 31 December.

 

This financial information has been prepared on a going concern basis and prepared on the historical cost basis. Refer to the Going Concern note for further details.

 

 

FORWARD-LOOKING STATEMENTS

These results were approved by the Board of Directors and authorised for issue on 26 April 2022. This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.

 

STATEMENT OF COMPLIANCE

While the financial information included in this preliminary announcement has prepared in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006, this announcement does not in itself contain sufficient information to comply with UK-adopted international accounting standards.

 

ADOPTION OF IFRS

The Group and Company financial statements have been prepared in accordance with IFRS, IAS and International Financial Reporting Interpretations Committee (IFRICs) effective as at 31 December 2021. The Group and Company have chosen not to adopt any amendments or revised standards early.

 

IFRSs ADOPTED IN THE YEAR

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB which are all effective from 1 January 2021. The most significant of these are as follows:

 

·      Interest Rate Benchmark Reform Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)

 

Those standards, amendments to standards, and interpretations have been adopted and did not have a material impact on the accounting policies of the Group.

 

 

 

 

 

IFRSs ISSUED BUT NOT YET EFFECTIVE

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early. The most significant of these are as follows, which are all effective for the period beginning 1 January 2022:

 

·      Amendments to IAS 1, 'Presentation of financial statements', on classification of liabilities

·      Amendments to IAS12 'Deferred tax' on deferred tax related to assets and liabilities arising from a single transaction

·      IFRS 3 'Business combination', reference to the Conceptual Framework and IAS 37, 'Provisions', on onerous contracts

·      A number of narrow-scope amendments to IFRS1, IAS 8, IAS16 and IAS17

·      A number of annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16

 

These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

 

BUSINESS COMBINATIONS

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that deferred tax assets or liabilities are recognised and measured in accordance with IAS 12 'Income taxes'.

Consideration may consist of deferred consideration and contingent consideration. Deferred consideration is not based on any performance related conditions and is payable on an agreed future date. Contingent consideration is based on certain performance related conditions and payable on an agreed future date, if those conditions are met.

Deferred consideration and contingent consideration is measured at their acquisition-date fair value and are taken into account in the determination of goodwill. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified.

The d-wise deferred consideration which was contingent on the continued employment of certain of the former management was initially excluded from the total purchase consideration. However, the acquisition accounting on d-wise has been adjusted for the year end which has resulted in the removal of the element treated at half year as employment remuneration. As a result, the full deferred consideration is now capitalisable and is included in the cost of business combination.

Contingent consideration that is classified as an asset or a liability is re-measured at subsequent reporting dates with the corresponding gain or loss being recognised in statement of comprehensive income.

 

 

 

 

 

GOING CONCERN

The financial position of the Group, its cash flows and liquidity position are set out in the primary statements within these financial statements.

Background

The Directors have adopted the going concern basis in preparing these financial statements after careful assessment of identified principal risks and the possible adverse impact on financial performance. The Directors have assessed the financial position and liquidity at the end of the reporting period and for the forecast period up to 30 April 2023, including sensitivity analysis. The going concern period covers the 12 months from the date of signing the financial statements. The process and key judgments in coming to this conclusion are set out below.

The Group's activities, including the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Strategic report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review.

Current trading and liquidity

The Group's trading performance for the year ended 31 December 2021 has been strong with Revenues of £46.0m and Adjusted EBITDA of £8.3m. Instem is fully operational, with all staff in all territories working from home in accordance with governmental guidelines, no staff have been furloughed and there is no intention of curtailing any business activities. The company has continued to recruit staff across its geographic footprint.

The Group signed a new financing arrangement on 8 April 2022, which consists of a committed facility of £10m with HSBC UK Bank plc to support the Group's working capital needs and its acquisition strategy, which can be extended up to £20.0m if needed, subject to further bank approval. The financial covenants have been considered in the forecast to ensure compliance. However, as of 31 December 2021, the Group had a net overdraft facility of £0.5m and a gross facility of £9.0m with NatWest Bank plc. As of 31 December 2021, the net overdraft facility with NatWest Bank plc was undrawn (2020: undrawn). 

Instem undertook an oversubscribed equity fund raise in July 2020, raising £15.0m net of expenses. The fund raise placed the Group in a very strong cash position which helped to accelerate the Group's acquisition strategy with the acquisitions of the Edge, d-wise and PDS. The net cash used in investing activities includes the net cash payment of £17.2m for purchasing those subsidiaries (net of cash acquired).

The period 2021 saw again strong net cash generated from operations of £10.3m (2020: £7.4m), largely due to operating cash inflows from the newly acquired businesses, key contracts, outsourced services and effective working capital management.

The proceeds of £0.8m ($1.1m) which were part of the US federal government support for businesses during the COVID-19 pandemic have been fully forgiven in 2021. As a result of the above and the positive organic cash generation achieved in the period, the cash balance decreased from £26.7m to £15m.

The Group acquired the earnings enhancing, cash generative business of Leadscope Inc, the Edge, d-wise, and PDS between November 2019 and September 2021, which have been steadily integrated within the Group during 2021.

The financial cash obligations associated with these acquisitions during 2022 are deferred and contingent consideration payments of £3.6m and £2.5m respectively. The contingent consideration reflects management's estimate of a 100% probability that the entities target profitability will be achieved. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be a combination of cash and shares of Instem plc at the discretion of the Group.

 

 

 

 

Sensitivity Analysis

The Company has considered two scenarios which are also linked to the company's risks when modelling the forecast results and cash flow. The sensitivity assessment includes the trading performance and cash flows of the three acquisitions occurred in 2023.

(a)   Base Case Scenario

The Group's detailed forecasts and projections, taking account of potential risks and uncertainties in the business, market and liquidity through sensitivity analysis, show that the Group has adequate resources to enable it to continue in operation through the forecast period ending 30 April 2023 from the approval date of these Consolidated Financial Statements. Accordingly, the Group continues to adopt the going concern basis in preparing its Consolidated Financial Statements.

The uncertainty as to the future impact on the Group of the ongoing conflict between Russia and Ukraine has been considered as part of the sensitivity analysis and as part of Group's adoption of the going concern basis.  We have no customers, suppliers or staff in either territory. Thus far we have not observed any material impact on our overall existing business or in the level of new business opportunities that are being presented to us in the markets in which we operate.

 The Group has a significant proportion of recurring revenue (circa 52% of total) from annual support & maintenance and SaaS contracts from a well-established global customer base.  Revenue is supported by a largely fixed cost base comprising of staff and offices.

(b)   Sensitised Scenario

Further stress testing has been carried out to ensure that the Group has sufficient cash resources to continue its operations until at least 30 April 2023. In preparing this analysis the following key risks were included causing a 35% loss of new business for the next twelve months and the risk effect of foreign exchange movements, particularly between the USD and GBP. Despite the negative impact of these sensitivities the model demonstrated that the Group remained viable however, the cash balance was reduced over the going concern period to April 2023.  

In a worse scenario where many of the identified risks occurred, the Group would take remedial action to counter the reduction in profit and cash through a cost cutting and fund-raising exercise that would include staff redundancies, general cost control measures. These further downside scenarios are considered unlikely.

Conclusion and Going Concern Statement

After considering the uncertainties described above, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing this annual report and accounts.

SIGNIFICANT JUDGEMENTS AND ESTIMATES

In the process of applying the Group's accounting policies, which are described above, management have made judgements and estimations about the future that have the most significant effect on the amounts recognised in the financial statements. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

Significant judgements

The following judgments have the most significant effect on the financial statements.

 

Revenue Recognition

The Group generates revenue from the provision of software licences, annual support, SaaS subscriptions, subscription and support, professional services, technology enabled outsourced services and consultancy services. Software licences, professional services and annual support are often bundled together in a contract which do not meet the criteria to be distinct performance obligation.

Even though, the promise to transfer services to the customer are separately identifiable, the nature of the promise, within the context of the contract, is to transfer combined promised services. The goods or services are highly interdependent, interrelated and the Group would not be able to fulfil its promise by transferring each of the goods or services independently.

Judgement is applied in determining how many performance obligations there are within each contract and the period in which these obligations will be fulfilled and recognised as revenue, based on the Group's accounting policies. For SaaS subscription, subscription and support and annual support the Group determines for each contract whether the promise is considered to be a single performance obligation as the subscription and support are highly interdependent on one another given that the customers are required to take the full package of both the software and support services i.e. Instem would not be able to provide the support services without the provision of the software nor provide the software without the support services.

Impairment of goodwill

 

In 2021, the CGUs are identified by the fact they are separate legal entities and so have their own intangible and tangible assets, other current assets and generate cash from their products and services that are separately identifiable from one another. The judgements were made in respect of the WACC, the revenue growth rate applied and the allocation of costs across the CGUs.

The carrying value of goodwill must be assessed for impairment annually. This requires a value in use estimate which is dependent on estimation of future cashflows and the use of an appropriate discount rate to discount those cash flows to their present value. The carrying value of goodwill as at 31 December 2021 was £34.6m (2020: £10.2m).

Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and any risks specific to the CGUs. The rates used to discount the future cashflows are based on the Business Unit pre-tax weighted average cost of capital. Where a CGU operates in multiple operating segments an average of the relevant WACCs has been used.

The revenue growth rates and margins are based on current Board-approved budgets and forecasts covering a period of five years. Management estimates are considering business growth rates, payroll and other cost base increases.

The data used for impairment testing procedures are directly linked to the Group's latest budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements.

 

Development Costs

 

The Group invests on a continual basis in the development of software for sale to third parties. There is a continual process of enhancements to and expansion of the software with judgement required in assessing whether the development costs meet the criteria for capitalisation. These judgements have been applied consistently year on year. In making this judgement, the Group evaluates, amongst other factors, whether there are future economic benefits beyond the current period, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Judgement is therefore required in determining the practice for capitalising development costs.

 

 

 

 

 

Estimation uncertainty

 

Information about estimations and assumptions that may have the most significant impact on recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

Provision for liabilities

 

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the probable outflow of resources, and a reliable estimate can be made of the amount of the obligation. As at 31 December 2021, the Group has a provision of £0.25m (2020: £0.25m) in respect of historical contract disputes as the directors have considered that the above provision conditions have been met. The provision represents the best estimate of the risks and considers all information and legal input received by the Group.

Contingent consideration

 

Where acquisition consideration includes consideration contingent on performance outcomes being met, the consideration is valued at the acquisition date based on performance forecasts available at the time. Those forecasts are reviewed at the reporting date and the consideration revised where materially different.

Pension scheme

 

As stated above the Group operates a defined benefit pension scheme. At the end of each six-monthly reporting period the Group seeks external expert actuarial advice on the assumptions to apply to the calculation of the scheme's liabilities. The Group then engages a separate, independent firm of pension advisors to calculate the scheme surplus or deficit at the reporting date for accounting purposes. The scheme deficit at 31 December 2021 is £2.0m (2020: £3.9m).

Revenue Recognition

 

For Professional services and technology enabled outsourced services revenue recognition there is a significant estimation of the planned project hours, which determines the percentage of completion of service revenue contracts. Before the project is started, the project manager estimates the budgeted hours needed for the agreed services. If the project is expected to overrun, then the project manager will amend the expected budgeted hours in accordance with the new available information which also mitigates the risk of early revenue recognition.

2             REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Segmental reporting

The Group has disaggregated revenue into various categories in the following tables which are intended to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

The Group's Chief Operating Decision Maker (CODM) is its chief executive and he monitors the performance of these operating segments as well as deciding on the allocation of resources to them alongside with the executive management team.

 

Historically the Group's finance systems have recorded costs centrally and have managed costs in this way. Over recent years the Group has expanded both organically and through acquisition, increasing the number of products and services offered and in 2020 the Group reported through three operating segments, Study Management, Regulatory Solutions and In Silico Solutions. During 2021 the fourth segment, Clinical Trial Acceleration (CTA), was established after following the acquisition of d-wise.

 

 

 

 

 

 

 

During 2020 this system enabled more centrally recorded costs to be allocated to the individual segments and that process was further developed during 2021.  The operations of the Group are managed centrally with group-wide functions including sales, marketing, software development, information technology, customer support, human resources and finance & administration. The CTA segment already bears the majority of its costs directly and as such reports a lower direct contribution margin to central overheads than the other three segments. The expectation in future years is to be able to allocate more centrally held operational costs to the individual segments as internal reporting systems evolve, thereby assisting the Board to use the segmental cost information for meaningful decision making.

 

The operations of the Group are managed centrally with group-wide functions including sales,        marketing, software development, IT, customer support, human resources and finance & administration.

 

The analysis provided below reflects costs directly attributable to the respective segments in 2021 and 2020, which are primarily third party costs of sale and costs of allocated employees. The remaining indirect operational costs are accounted for centrally and are not allocated to specific segments.

 

 

SEGMENTAL REPORTING 2021	Study Management	Regulatory Solutions	In Silico Solutions	Clinical Trial Acceleration	Total
	£000	£000	£000	£000	£000
Total revenue	20,259	10,010	3,042	12,706	46,017
Direct attributable costs	(10,388)	(6,016)	(1,681)	(11,308)	(29,393)
	______	______	______	______	______
Contribution to indirect overheads	9,871	3,994	1,361	1,398	16,624
Contribution to indirect overheads %	49%	40%	45%	11%
Central unallocated indirect costs					(8,374)
Adjusted EBITDA					______ 8,250
Depreciation					(312)
Amortisation of intangibles arising on acquisitions					(1,563)
Amortisation of internally generated intangibles					(851)
Depreciation of right of use assets					(945)
					______
OPERATING PROFIT BEFORE NON-RECURRING COSTS					4,579
Non-recurring costs					(1,286)
Non-recurring income					805
					______
OPERATING PROFIT AFTER NON-RECURRING COSTS					4,098
Finance income					30
Finance costs					(1,144)
					______
PROFIT BEFORE TAXATION					2,984

 

 

 

 

 

SEGMENTAL REPORTING 2020	Study Management	Regulatory Solutions	In Silico Solutions	Clinical Trial Acceleration	Total
	£000	£000	£000	£000	£000
Total revenue	15,054	9,839	3,324	-	28,217
Direct attributable costs	(3,516)	(2,046)	(1,630)	-	(7,192)
	______	______	______	______	______
Contribution to indirect overheads	11,538	7,793	1,694	-	21,025
Contribution to indirect overheads %	77%	79%	51%
Central unallocated indirect costs					(15,106)
Adjusted EBITDA					______ 5,919
Depreciation					(138)
Amortisation of intangibles arising on acquisitions					(664)
Amortisation of internally generated intangibles Depreciation of right of use assets					(736) (572)
					______
OPERATING PROFIT BEFORE NON-RECURRING COSTS					3,809
Non-recurring costs					(606)
					______
OPERATING PROFIT AFTER NON-RECURRING COSTS					3,203
Finance income					38
Finance costs					(692)
					______
PROFIT BEFORE TAXATION					2,549