Editing Instem plc: Final Results (section)

===== Amortisation of right of use assets =====
|945
|572
|}
The total cash outflow for leases in 2021 was £1.0m (2020: £0.7m).

'''8  Earnings per share'''

Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.  Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option scheme.

The deferred and contingently issuable shares in relation to d-wise acquisition which could potentially dilute the basic EPS in the future were not included in the calculation of diluted EPS because they are antidilutive for the period of 2021.

The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) minus the issue price.  The number of the ordinary shares that could have been acquired at their average market price during the period are ignored. However, the shares that would generate no proceeds and would not have effect on profit or loss attributable to ordinary shares outstanding are included.
{| class="wikitable"
|+
!
! colspan="3" |2021
! colspan="3" |2020
|-
!
!Profit after tax (£000)
!Weighted average number of shares ('000)
!Profit per share (Pence)
!Profit  after tax (£000)
!Weighted average number of shares ('000)
!Profit per share (Pence)
|-
|Earnings per share - Basic
|


1,678
|


21,591
|


7.8
|


2,274
|


18,421
|


12.3
|-
|Potentially dilutive shares
|


-
|


1,128
|


-
|


-
|


1,231
|


-
|-
|Earnings per share - Diluted
|


1,678
|


22,719
|


7.4
|


2,274
|


19,652
|


11.6
|}
'''Adjusted earnings per share'''

Adjusted earnings per share is calculated after adjusting for the effect of foreign currency exchange on the revaluation of inter-group balances included in finance income/(costs), non-recurring items, impairment of goodwill and capitalised development and amortisation of intangibles on acquisitions. Diluted adjusted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option scheme.  The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options.
{| class="wikitable"
|+
!
! colspan="3" |


2021
! colspan="3" |


2020
|-
!
!Adjusted Profit after tax (£000)
!Weighted average number of shares ('000)
!Adjusted Earnings per share (Pence)
!Adjusted Profit after tax (£000)
!Weighted average number of shares ('000)
!Adjusted Earnings per share (Pence)
|-
|Earnings per share - Basic
|


3,704
|


21,591
|


17.2
|


3,752
|


18,421
|


20.4
|-
|Potentially dilutive shares
|


-
|


1,128
|
|


-
|


1,231
|


-
|-
|Earnings per share - Diluted
|


3,704
|


22,719
|


16.3
|


3,752
|


19,652
|


19.1
|}
{| class="wikitable"
|+
!
!2021

£000
!2020

£000
|-
|Reconciliation of adjusted profit before tax:
|
|
|-
|Reported profit before tax
|2,984
|2,549
|-
|Non-recurring costs
|1,286
|606
|-
|Non-recurring income
|(805)
|<nowiki>-</nowiki>
|-
|Amortisation of acquired intangibles
|1,563
|664
|-
|Impairment of goodwill and capitalised development costs
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|-
|Foreign exchange differences on revaluation of inter-group balances
|(18)
|208
|-
|Adjusted profit before tax
|5,010
|4,027
|-
|Tax
|(1,306)
|(275)
|-
|Adjusted profit after tax
|3,704
| 3,752
|-
|Profit after tax
|1,678
|2,274
|}
'''9  Acquisition of The Edge Software Consultancy Ltd ('The Edge')'''

On 1 March 2021, Instem acquired 100% of the issued share capital of The Edge. The acquisition has increased the group's market share in the global Life Science Sector and complements the group in continuing its expansion and development in this industry.
{| class="wikitable"
|+
!Company
!Principal activity
!Date of acquisition
!Proportion of voting equity interests acquired

%
!Consideration

£000
|-
|The Edge
|Provider of Discovery Technology Solutions software and services to Life Science sector
|1 March 2021
|100
|9,221
|}
Details of the purchase consideration, the net assets acquired and goodwill are as follows:
{| class="wikitable"
|+Consideration
|
|£000
|-
|Initial cash paid
|5,500
|-
|Initial share consideration
|2,000
|-
|Deferred consideration - cash payable March 2022
|500
|-
|Contingent consideration - cash payable by June 2022
|1,000
|-
|Contingent consideration - cash payable March 2023
|1,000
|-
|Working capital and cash adjustment - cash receivable March 2022
|(67)
|-
|Total consideration
|9,933
|-
|Discounting of estimated future cashflows
|(712)
|-
|Present value of consideration
|9,221
|}
The initial share consideration was satisfied by the issue of 391,920 new Instem plc ordinary shares at a value of £2.0m which was based on the published share price. The premium arising on the share issue of £2.0m has been credited to the merger relief reserve.

The appropriate discounting has been applied to the debt instruments.

The deferred consideration is not based on any performance related conditions and is payable in March 2022. The contingent consideration is based on certain performance related conditions in the twelve- month period post-completion. The contingent consideration in the table above is based on the forecast estimate that the performance related conditions will be fully met and the full consideration will be payable.  The contingent consideration was re-measured at the reporting date.  The deferred consideration had been discounted using Instem's estimated cost of borrowing and the contingent consideration has been discounted using the company's Internal Rate of Return ('IRR').

Acquisition related costs amounting to £0.2m have been recognised as an expense within non-recurring items in the Consolidated Statement of Comprehensive Income.
{| class="wikitable"
|+Fair value of assets acquired and liabilities recognised at the date of acquisition
|
|Fair Value

£000
|-
|Non-Current Assets
|
|-
|Customer relationships

Intellectual property

Brand
|2,550

1,342

105
|-
|Right of use assets
|37
|-
|
|
|-
|Current Assets
|
|-
|Cash and cash equivalents
|2,570
|-
|Trade and other receivables
|407
|-
|Deferred tax asset
|64
|-
|
|
|-
|Current Liabilities
|
|-
|Trade and other payables
|(430)
|-
|Deferred income
|(555)
|-
|Lease liabilities
|(36)
|-
|
|
|-
|Non-Current Liabilities
|
|-
|Deferred tax on acquisition
|(759)
|-
|
|
|-
|Fair value of identifiable net assets acquired
|5,295
|}
{| class="wikitable"
|+Goodwill arising on acquisition
|
|£000
|-
|Consideration transferred
|9,221
|-
|Less: fair value of identifiable net assets
|(5,295)
|-
|Goodwill arising on acquisition
|3,926
|}
'''Goodwill'''

Goodwill of £3.9m primarily relates to the ability to generate growth from new customers, synergies provided by the Group and the skill and expertise of The Edge's staff.

'''Identifiable net assets'''

A provisional fair value exercise to determine the fair value of assets and liabilities acquired has been carried out. Fair values are provisional as they are within the twelve month hindsight period to adjust fair values. No fair value adjustments have been made to the assets and labilities acquired.

The fair value of intangible assets are:

* Customer relationships of £2.6m calculated using the income approach - excess earnings. Acquired customer relationships consisting of ongoing relationships with companies to which The Edge provides annual licenses, maintenance assistance and bespoke services.
* Intellectual property of £1.3m calculated using the income approach - relief from royalty. Two proprietary software packages were acquired, namely BioRails and Morphit.
* Brands of £0.1m calculated using the income approach - relief from royalty. 'The Edge' brand and sub-brands (principally BioRails and Morphit) are considered in aggregate a separable intangible asset and a driver of the overall business model.

'''Acquired receivables'''

The fair value of acquired trade receivables is £0.079m as no loss allowance was required to be recognised on acquisition.

'''Impact of acquisition on the results of the Group'''

The acquired business contributed revenues of £1.9m and net profit of £1.2m to the group for the period from 1 March to 31 December 2021.

If this business combination had been in effect at 1 January 2021, the revenue of The Edge would have been £2.3m and the profit for the year would have been £1.4m. These values do not represent a measure of the performance of The Edge as the company's accounting policy have been changed at the acquisition date to comply with the policies of the Group.

{| class="wikitable"
|+Purchase consideration - cash outflow
|
|£000
|-
|Outflow of cash to acquire subsidiary, net of cash acquired
|
|-
|Initial cash consideration
|4,000
|-
|Net cash adjustment (after deduction of estimated debt)
|1,500
|-
|Less: Balance acquired 
|
|-
|Cash
|(2,570)
|-
|Net outflow of cash - investing activities
|2,930
|}
'''10  Acquisition of d-wise Technologies, Inc'''

On 20 March 2021, Instem exchanged contracts to acquire the 100% of the issued share capital of US-based clinical trial technology & consulting leader d-Wise Technologies, Inc ("d-wise"). The acquisition was completed on 1 April 2021. The acquisition has increased the group's market share in the global Life Science Sector and complements the group by entering an attractive adjacent area of clinical trial analysis and submission.
{| class="wikitable"
|+
!Company
!Principal activity
!Date of acquisition
!Proportion of voting equity interests acquired

%
!Consideration

£000
|-
|d-wise
|Provider of clinical trial acceleration solutions to Life Science sector
|1 April 2021
|100
|22,022
|}
Details of the purchase consideration excluding conditional deferred consideration, the net assets acquired and goodwill are as follows:
{| class="wikitable"
|+Consideration
!
!


$000
!


  £000
|-
|Initial cash consideration
|13,000
|9,437
|-
|Initial share consideration
|7,000
|5,044
|-
|Deferred consideration (1 April 2022) - To be settled in cash
|3,128
|2,271
|-
|Deferred consideration (1 April 2022) - To be settled in shares
|1,042
|756
|-
|Deferred consideration (1 April 2023) - To be settled in cash
|4,347
|3,156
|-
|Contingent consideration (1 March 2022) - To be settled in cash or shares
|1,500
|1,089
|-
|Contingent consideration (1 March 2023) - To be settled in cash
|1,500
|1,089
|-
|Working capital adjustment - (Q3 2021) - Settled in cash
|5
|4
|-
|Total consideration
|31,522
|22,846
|-
|Discounting of estimated future cashflows
|
|(824)
|-
|Present value of consideration
|
|22,022
|}
The initial share consideration was satisfied by the issue of 868,203 new Instem plc ordinary shares at a value of $7.0m (£5.0m) which was based on the published share price. The premium arising on the share issue of £5.0m has been credited to the merger relief reserve.

The appropriate discounting has been applied to the debt instruments.

The deferred consideration is not based on any performance related conditions and is payable in two instalments in April 2022 and 2023. The contingent consideration is based on certain performance related conditions in the twelve-month period post-completion.  The deferred consideration has been discounted using the interest rate as defined in the share purchase agreement and the contingent consideration has been discounted using the company's IRR.

The deferred and contingent consideration to be settled in shares should be equal the nominal value of the deferred and contingent promissory note, divided by the average closing price of Instem Stock.

The contingent consideration in the table above is based on the forecast estimate that the performance related conditions will be fully met and the full consideration will be payable.  The contingent consideration was re-measured at the reporting date.

Acquisition related costs amounting to £1.2m have been recognised as an expense within non-recurring items in the Consolidated Statement of Comprehensive Income.
{| class="wikitable"
|+Fair value of assets acquired and liabilities recognised at the date of acquisition
!
!Fair value (£000)
|-
|Non-Current Assets
|
|-
|Customer relationships

Intellectual property

Brand names
|6,094

1,061

1,134
|-
|Property, plant and equipment
|491
|-
|Right of use assets
|662
|-
|
|
|-
|Current Assets
|
|-
|Trade and other receivables
|5,765
|-
|Cash and cash equivalents
|1,800
|-
|Accrued Income
|551
|-
|
|
|-
|Current Liabilities
|
|-
|Trade and other payables
|(1,634)
|-
|Deferred income
|(4,230)
|-
|Financial Liabilities
|(48)
|-
|Lease liability
|(662)
|-
|
|
|-
|Non-Current Liabilities
|
|-
|Deferred tax on acquisition
|(2,072)
|-
|
|
|-
|Fair value of identifiable net liabilities acquired
|8,912
|}
{| class="wikitable"
|+Goodwill arising on acquisition
|
|£000
|-
|Consideration transferred
|22,022
|-
|Less: fair value of identifiable net assets
|(8,912)
|-
|Goodwill arising on acquisition
|13,110
|}
'''Goodwill'''

Goodwill of £13.1m primarily relates to the ability to enter an attractive adjacent area of clinical trial analysis and submission, generating growth from new customers, synergies provided by the Group and the skill and expertise of the d-wise staff.

'''Identifiable net assets'''

A provisional fair value exercise to determine the fair value of assets and liabilities acquired has been carried out. Fair values are provisional as they are within the twelve month hindsight period to adjust fair values. Except for the Deferred revenue no other fair value adjustments have been made to the assets and liabilities acquired.

The fair value of intangible assets are:

* Customer relationships of £6.1m calculated using the income approach - excess earnings. Acquired customer relationships consisting of ongoing relationships with companies to which d-wise provides hosting and consultancy services, support and maintenance and product licences.
* Intellectual property of £1.1m calculated using the income approach - relief from royalty. Two proprietary software products were acquired, namely Blur and Reveal.
* Brands of £1.1m calculated using the income approach - relief from royalty. The 'd-wise' brand is a separable intangible asset and a driver of the overall business model in the fair value measurement and the proportion of overall enterprise value attributed to the brand. The brand has been trading since 2003 and is well established within the pharmaceutical industry.

'''Acquired receivables'''

The fair value of acquired trade receivables is £5.1m as no loss allowance was required to be recognised on acquisition.

'''Impact of acquisition on the results of the Group'''

Profit for the year end includes a profit of £0.5m attributable to the additional business generated by d-wise from 1 April to 31 December 2021. Revenue for the year includes £12.7m in respect of d-wise.

If this business combination had been effected at 1 January 2021, the revenue of d-wise would have been £17.3m and the profit for the year would have been £1m. The directors consider these values represent an approximate measure of the performance of d-wise on a yearly basis as the fair value adjustment on the acquired deferred revenue needed to be considered for the future periods.
{| class="wikitable"
|+Purchase consideration - cash outflow
|
|£000
|-
|Outflow of cash to acquire subsidiary, net of cash acquired
|
|-
|Initial cash consideration
|9,437
|-
|Working capital adjustment - (Q3 2021) - Settled in cash
|4
|-
|Less: Balance acquired
|
|-
|Cash
|(1,800)
|-
|Net outflow of cash - investing activities
|7,641
|}
'''11  Acquisition of PDS Pathology Data Systems Ltd'''

On 1 September 2021, Instem acquired the 100% of the issued share capital of PDS Pathology Data Systems Ltd ("PDS"), a life sciences software company with headquarters in Switzerland and offices in the United States and Japan. The acquisition has increased the group's market share in the global Life Science Sector and complements the group in continuing its expansion and development in this industry.
{| class="wikitable"
|+
!Company
!Principal activity
!Date of acquisition
!Proportion of voting equity interests acquired

%
!Consideration

£000
|-
|PDS
|Provider of Discovery Technology Solutions for non-clinical study management and regulatory software and services
|1 September 2021

|100
|9,309
|}
Details of the purchase consideration excluding the benefit of their former PDS's shareholders, the net assets acquired and goodwill are as follows:
{| class="wikitable"
|+Consideration
!
!


CHF000
!


  £000
|-
|Initial cash paid
|7,131
|5,665
|-
|Initial share consideration
|3,500
|2,790
|-
|Deferred consideration (1 September 2022) - To be settled in cash
|1,000
|794
|-
|Working capital adjustment - (Q3 2021) - Settled in cash
|99
|79
|-
|Total consideration
|11,730
|9,328
|-
|Discounting of estimated future cashflows
|
|(19)
|-
|Present value of consideration
|
|9,309
|}
The initial share consideration was satisfied by the issue of 359,157 new Instem plc ordinary shares at a value of CHF3.5m (£2.8m) which was based on the published share price. The premium arising on the share issue of £2.75m has been credited to the merger relief reserve.

The appropriate discounting has been applied to the debt instruments.

The deferred consideration is not based on any performance related conditions and is payable in in September 2022. The deferred consideration has been discounted using the PDS'S weighted average cost of capital (WACC).

Instem plc acquired also the benefit of the former PDS's shareholder loan for a consideration of CHF3m (£2.4m) which was excluded from the total purchase consideration and is recorded as intercompany balance between Instem plc and PDS. The above treatment will not affect the Group's cash position as the total consideration payable remains at CHF14,7m.

Acquisition related costs amounting to £0.3m have been recognised as an expense within non-recurring items in the Consolidated Statement of Comprehensive Income.
{| class="wikitable"
|+Fair value of assets acquired and liabilities recognised at the date of acquisition
!
!Fair Value

£000
|-
|Non-Current Assets
|
|-
|Customer relationships

Intellectual property

Brand names
|2,047

1,607

153
|-
|Property, plant and equipment
|34
|-
|Right of use assets
|251
|-
|
|
|-
|Current Assets
|
|-
|Trade and other receivables
|528
|-
|Cash and cash equivalents
|1,475
|-
|Accrued Income
|9
|-
|
|
|-
|Current Liabilities
|
|-
|Trade and other payables
|(249)
|-
|Deferred income
|(708)
|-
|Loan from former PDS's shareholders
|(2,387)
|-
|Lease liability
|(251)
|-
|
|
|-
|Non-Current Liabilities
|
|-
|Deferred tax on acquisition
|(568)
|-
|Provisions
|(40)
|-
|
|
|-
|Fair value of identifiable net liabilities acquired
|1,901
|}
{| class="wikitable"
|+Goodwill arising on acquisition
!
!£000
|-
|Consideration transferred
|9,309
|-
|Less: fair value of identifiable net assets
|(1,901)
|-
|Goodwill arising on acquisition
|7,408
|}
'''Goodwill'''

Goodwill of £7.4m primarily relates to the ability to enter an attractive adjacent area of clinical trial analysis and submission, generating growth from new customers, synergies provided by the Group and the skill and expertise of the d-wise staff.

'''Identifiable net assets'''

A provisional fair value exercise to determine the fair value of assets and liabilities acquired has been carried out. Fair values are provisional as they are within the twelve month hindsight period to adjust fair values. Except for the Deferred revenue no other fair value adjustments have been made to the assets and liabilities acquired.

The fair value of intangible assets are:

* Customer relationships of £2.1m calculated using the income approach - excess earnings. Acquired customer relationships consisting of ongoing relationships with companies to which PDS provides licenses, hosting services, support and maintenance, and other services.
* Intellectual property of £1.6m calculated using the income approach - relief from royalty. Two proprietary software products were acquired, namely LIMS and TRANSEND.
* Brands of £0.2m calculated using the income approach - relief from royalty. The 'PDS' brand is a separable intangible asset and a driver of the overall business model in the fair value measurement and the proportion of overall enterprise value attributed to the brand. The brand has been trading since 1981 and is well established n the life-science industry.

'''Acquired receivables'''

The fair value of acquired trade receivables is £0.4m as no loss allowance was required to be recognised on acquisition.

'''Impact of acquisition on the results of the Group'''

Profit for the year includes a loss of £0.1m attributable to the additional business generated by PDS from 1 September to 31 December 2021. The loss was incurred due to fair value adjustment on the acquired deferred revenue of £0.1m. Revenue for the year includes £1.4m in respect of PDS.

If this business combination had been effected at 1 January 2021, the revenue of PDS would have been £4.3m and the loss for the year would have been £0.05m. The directors consider these values represent an approximate measure of the performance of PDS on a year basis as the fair value adjustment on the acquired deferred revenue needed to be considered for the future periods.
{| class="wikitable"
|+Purchase consideration - cash outflow
|
|£000
|-
|Outflow of cash to acquire subsidiary, net of cash acquired
|
|-
|Initial cash consideration
|3,701
|-
|Management participation, commission and bonus - Settled in cash
|1,964
|-
|Former PDS's shareholder loan
|2,387
|-
|Working capital adjustment - (Q3 2021) - Settled in cash
|79
|-
|Less: Balance acquired
|
|-
|Cash
|(1,475)
|-
|Net outflow of cash - financing and investing activities
|6,656
|}
The benefit of the former PDS's shareholder loan has been presented as a financing cash flow as does not form part of the consideration transferred.

'''12  Provision for liabilities'''
{| class="wikitable"
|+
|
|2021

£000
|2020

£000
|-
|