Instem plc: Final Results: Difference between revisions

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== Details ==
== Details ==
 
'''Chairman's Statement'''
== Chairman's Statement ==
 


The achievements of the Company in the year have been outstanding. Not only has our operational performance been exceptional but the business has also accomplished a fundamental strategic shift in its scale and reach as a result of the completion of three important acquisitions. As a consequence, our standing within the wider industry has been significantly enhanced.
The achievements of the Company in the year have been outstanding. Not only has our operational performance been exceptional but the business has also accomplished a fundamental strategic shift in its scale and reach as a result of the completion of three important acquisitions. As a consequence, our standing within the wider industry has been significantly enhanced.
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Whilst the integration of the acquired businesses is ongoing, we have already seen the benefits of their skillsets and teams operating within the enlarged Group, providing a significant contribution to our overall financial performance in the year.
Whilst the integration of the acquired businesses is ongoing, we have already seen the benefits of their skillsets and teams operating within the enlarged Group, providing a significant contribution to our overall financial performance in the year.


== Operations ==
'''Operations'''
 
The Company's strong infrastructure and ability to operate remotely provided essential resilience in our business operations as the pandemic continued. We are delighted with and thankful for the team's efforts throughout this challenging period.
The Company's strong infrastructure and ability to operate remotely provided essential resilience in our business operations as the pandemic continued. We are delighted with and thankful for the team's efforts throughout this challenging period.


We have made notable progress on a number of key metrics during the Period. In particular:
We have made notable progress on a number of key metrics during the Period. In particular:


· Continued growth in SaaS-based revenues (increased 21% to £9.7m) both through new business wins and via the ongoing conversion of existing clients
* Continued growth in SaaS-based revenues (increased 21% to £9.7m) both through new business wins and via the ongoing conversion of existing clients
* Total Group revenues increased 63% - including the partial year impact of the acquisitions completed during the period
* Adjusted EBITDA increased 39%
* Net cash generated from operations of £10.3m


· Total Group revenues increased 63% - including the partial year impact of the acquisitions completed during the period
'''Corporate Enhancement'''


· Adjusted EBITDA increased 39%
· Net cash generated from operations of £10.3m
== Corporate Enhancement ==
We were delighted to welcome Mr Riaz Bandali to the Board in December 2021. Riaz has spent his entire career in the healthcare and life sciences industries in a variety of strategic, commercial and operational roles at senior level, also including exposure to fundraising and M&A activity and, as such, brings a wealth of relevant experience and contacts in the North American and wider life sciences industry. We are also continuing with our efforts to identify a further suitable Independent NED candidate and look forward to updating shareholders in due course.
We were delighted to welcome Mr Riaz Bandali to the Board in December 2021. Riaz has spent his entire career in the healthcare and life sciences industries in a variety of strategic, commercial and operational roles at senior level, also including exposure to fundraising and M&A activity and, as such, brings a wealth of relevant experience and contacts in the North American and wider life sciences industry. We are also continuing with our efforts to identify a further suitable Independent NED candidate and look forward to updating shareholders in due course.


We were also delighted to appoint Stifel  as Joint broker alongside/with Singer Capital Markets to enhance our presence, both in the North American and European investor markets.
We were also delighted to appoint Stifel  as Joint broker alongside/with Singer Capital Markets to enhance our presence, both in the North American and European investor markets.


== Looking Forward ==
'''Looking Forward'''
 
In the short term, we are confident that we can continue to execute our growth plans for the Group. That said, labour cost inflation, in particular, has significantly increased in recent times. As a result, although anticipating material improvement over 2021, we are prudently moderating our profit expectations for the current year, whilst planning to regain ground in the following year, as justifiable price increases flow through to revenue.
In the short term, we are confident that we can continue to execute our growth plans for the Group. That said, labour cost inflation, in particular, has significantly increased in recent times. As a result, although anticipating material improvement over 2021, we are prudently moderating our profit expectations for the current year, whilst planning to regain ground in the following year, as justifiable price increases flow through to revenue.


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Whilst our near-term focus remains on completing the successful integration of the recently acquired businesses, the Board believes that this new platform will create substantial opportunities for further development of the business. These include:
Whilst our near-term focus remains on completing the successful integration of the recently acquired businesses, the Board believes that this new platform will create substantial opportunities for further development of the business. These include:


Organic revenue growth from additional market penetration, cross-selling and the introduction of new products and services
* Organic revenue growth from additional market penetration, cross-selling and the introduction of new products and services
 
* Margin improvement through conversion to SaaS deployment and leveraging our global infrastructure
Margin improvement through conversion to SaaS deployment and leveraging our global infrastructure
* Accretive M&A and strategic partnerships in existing markets, as well as entry into related adjacent areas.
 
Accretive M&A and strategic partnerships in existing markets, as well as entry into related adjacent areas.
 


In summary, we believe that the momentum and platform we now have in place ensures that the Company is well positioned for continued success over the longer term.
In summary, we believe that the momentum and platform we now have in place ensures that the Company is well positioned for continued success over the longer term.


David Gare


Non-Executive Chairman


26 April 2022


== David Gare ==
'''Chief Executive's Report'''
Non-Executive Chairman 26 April 2022


== Chief Executive's Report ==
'''Strategic Development'''


=== Strategic Development ===
During 2021, the Group materially advanced its ability to pursue its strategic thesis of providing data driven, "in silico" alternatives to traditional client experimental processes with the aim of radically reducing the cost and time of life sciences R&D. The strategy is based on leveraging trusted client and regulatory relationships and our intimate understanding of complex scientific data, established by providing a broad portfolio of market leading IT solutions that optimize today's life sciences R&D processes, from early discovery to late-stage clinical trials.  The acquisition of The Edge has strengthened our position in discovery and d-wise adds a well-respected market leader in the analysis and de-identification of clinical trial data.  Instem's already strong market presence in non-clinical development was enhanced by the acquisition of long-term competitor PDS and we are now well positioned to provide innovative solutions across the entire R&D continuum.
During 2021, the Group materially advanced its ability to pursue its strategic thesis of providing data driven, "in silico" alternatives to traditional client experimental processes with the aim of radically reducing the cost and time of life sciences R&D. The strategy is based on leveraging trusted client and regulatory relationships and our intimate understanding of complex scientific data, established by providing a broad portfolio of market leading IT solutions that optimize today's life sciences R&D processes, from early discovery to late-stage clinical trials.  The acquisition of The Edge has strengthened our position in discovery and d-wise adds a well-respected market leader in the analysis and de-identification of clinical trial data.  Instem's already strong market presence in non-clinical development was enhanced by the acquisition of long-term competitor PDS and we are now well positioned to provide innovative solutions across the entire R&D continuum.


Organic growth remained strong, with retention of recurring SaaS and Annual Support revenue once again ahead of our 98% key performance indicator and new business win rates confirming our market leadership across our broad portfolio.  Although the increasing rate of SaaS deployment, for existing and new clients, moderated short term revenue growth, due to the switch from perpetual license revenue recognition to longer term subscription rentals, overall organic revenue growth remained strong.
Organic growth remained strong, with retention of recurring SaaS and Annual Support revenue once again ahead of our 98% key performance indicator and new business win rates confirming our market leadership across our broad portfolio.  Although the increasing rate of SaaS deployment, for existing and new clients, moderated short term revenue growth, due to the switch from perpetual license revenue recognition to longer term subscription rentals, overall organic revenue growth remained strong.


=== Market Review ===
'''Market Review'''
 
The market backdrop continues to be favourable for the Group given global population growth and life expectancy underpinning increased demand for successful innovation in life sciences. Increasing amounts of money are being invested in the biotech industry with the pharmaceuticals sector investing heavily in drug development, underpinning a strong pipeline for Instem. The market dynamics were highlighted further by the ongoing COVID-19 pandemic, which presented a number of new opportunities as R&D increased with all the major companies focusing on developing vaccines or therapies.
The market backdrop continues to be favourable for the Group given global population growth and life expectancy underpinning increased demand for successful innovation in life sciences. Increasing amounts of money are being invested in the biotech industry with the pharmaceuticals sector investing heavily in drug development, underpinning a strong pipeline for Instem. The market dynamics were highlighted further by the ongoing COVID-19 pandemic, which presented a number of new opportunities as R&D increased with all the major companies focusing on developing vaccines or therapies.


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The constant development of the drug discovery pipeline continues to drive demand for Instem's solutions - which enable companies to provide faster and cheaper routes to market for their life changing products. Importantly, the regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND") continues to underpin longer term opportunity and visibility in the non-clinical segment. Similar regulatory standards help with demand for our clinical trial analysis solutions and mandatory provision of de-identified clinical trial data for European and Canadian regulatory authority approved drugs enhances demand for our clinical trial transparency software and services.
The constant development of the drug discovery pipeline continues to drive demand for Instem's solutions - which enable companies to provide faster and cheaper routes to market for their life changing products. Importantly, the regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND") continues to underpin longer term opportunity and visibility in the non-clinical segment. Similar regulatory standards help with demand for our clinical trial analysis solutions and mandatory provision of de-identified clinical trial data for European and Canadian regulatory authority approved drugs enhances demand for our clinical trial transparency software and services.


== Business Performance ==
'''Business Performance'''
 
'''Study Management'''


=== Study Management ===
Performance here was very pleasing, with revenue growth compared with the prior period of 35%, with 17% organic growth and 17% from acquisitions, including 10 months contribution from The Edge and 4 months from PDS.
Performance here was very pleasing, with revenue growth compared with the prior period of 35%, with 17% organic growth and 17% from acquisitions, including 10 months contribution from The Edge and 4 months from PDS.


The 11% increase in the number of drugs in the non-clinical stage of development has supported significant growth for the contract research organizations (CROs) specializing in this area and they in turn have been purchasing additional users for our products, additional product modules that they had not yet licensed and services to support their successful deployment and use of our solutions.
The 11% increase in the number of drugs in the non-clinical stage of development has supported significant growth for the contract research organizations (CROs) specializing in this area and they in turn have been purchasing additional users for our products, additional product modules that they had not yet licensed and services to support their successful deployment and use of our solutions.


The majority of the revenue associated with orders in excess of £2.7m, announced for one of our largest CRO clients on 15 December 2020 and in our 14 January 2021 Trading Update, was recognized in 2021 and we continue to collaborate extensively with this customer as they look for competitive advantage through technology investment. Most of this additional revenue was study management related but also included new SEND related capabilities, much of which will benefit the wider SEND community.


The majority of the revenue associated with orders in excess of £2.7m, announced for one of our largest
The acquisition of The Edge has broadened Instem's reach into the Discovery Study Management market, providing scope for increased cross-selling particularly in the Drug Metabolism & Pharmacokinetics (DMPK) field. The Edge extends the Company's reach within existing and new clients and enhances our technology offering.  Provided predominantly on a subscription basis, The Edge has helped to expand our recurring revenue.


CRO clients on 15 December 2020 and in our 14 January 2021 Trading Update, was recognized in 2021 and
'''In Silico Solutions'''


we continue to collaborate extensively with this customer as they look for competitive advantage through
technology investment. Most of this additional revenue was study management related but also included
new SEND related capabilities, much of which will benefit the wider SEND community.
The acquisition of The Edge has broadened Instem's reach into the Discovery Study Management market, providing scope for increased cross-selling particularly in the Drug Metabolism & Pharmacokinetics (DMPK) field. The Edge extends the Company's reach within existing and new clients and enhances our technology
offering.  Provided predominantly on a subscription basis, The Edge has helped to expand our recurring revenue.
=== In Silico Solutions ===
Following a slow H1 2021, as a result of the pandemic, demand picked up during H2.  This is an area where we have historically generated significant market awareness and sales pipeline at scientific conferences, as both Instem staff and reference clients presented a new, "disruptive" approach to the established method of assessing the potential safety issues of modulating a biological target thought to offer therapeutic benefit.  We were eagerly awaiting the post COVID-19 return to in person conferences, which were further delayed by the Delta and Omicron variants.  Post period end, in late March 2022 we attended the largest event of this type, the "Society of Toxicology" annual meeting, and were extremely encouraged by the strong interest in our In Silico solutions.
Following a slow H1 2021, as a result of the pandemic, demand picked up during H2.  This is an area where we have historically generated significant market awareness and sales pipeline at scientific conferences, as both Instem staff and reference clients presented a new, "disruptive" approach to the established method of assessing the potential safety issues of modulating a biological target thought to offer therapeutic benefit.  We were eagerly awaiting the post COVID-19 return to in person conferences, which were further delayed by the Delta and Omicron variants.  Post period end, in late March 2022 we attended the largest event of this type, the "Society of Toxicology" annual meeting, and were extremely encouraged by the strong interest in our In Silico solutions.


In November 2021 the Company announced the release of the latest edition of its Leadscope Model Applier computational toxicology software solution. This release included a comprehensive package of new and updated models to meet the growing market demand for in silico solutions, which are often heavily encouraged and supported by the global regulatory authorities.
In November 2021 the Company announced the release of the latest edition of its Leadscope Model Applier computational toxicology software solution. This release included a comprehensive package of new and updated models to meet the growing market demand for in silico solutions, which are often heavily encouraged and supported by the global regulatory authorities.


=== Regulatory Solutions ===
'''Regulatory Solutions'''
 
Every drug company is required to submit non-clinical data in the SEND format to the FDA (Food and Drug Administration) as part of the processes for testing and getting approval for a new drug. The combination of the industry's focus on addressing a continuing backlog of SEND conversion work, in addition to the standard being extended to new study types, provides a solid platform for continued growth.
Every drug company is required to submit non-clinical data in the SEND format to the FDA (Food and Drug Administration) as part of the processes for testing and getting approval for a new drug. The combination of the industry's focus on addressing a continuing backlog of SEND conversion work, in addition to the standard being extended to new study types, provides a solid platform for continued growth.


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The acquisition of competitor PDS allows for greater industry standardization on Instem's SEND technology platform and has brought a further 17 US-based SEND consultants to an outsourced services team of 72 people, 38 of whom are based in India.  Instem's expertise, capacity, and business in this area is unrivalled.
The acquisition of competitor PDS allows for greater industry standardization on Instem's SEND technology platform and has brought a further 17 US-based SEND consultants to an outsourced services team of 72 people, 38 of whom are based in India.  Instem's expertise, capacity, and business in this area is unrivalled.


 
'''Clinical Trial Acceleration'''
 
Clinical Trial Acceleration
 


The acquisition of d-wise on 1 April 2021 led to the creation of a fourth business unit, Clinical Trial Acceleration, which pleasingly met its EBITDA-based earn out target for the financial year ending 31 December 2021.
The acquisition of d-wise on 1 April 2021 led to the creation of a fourth business unit, Clinical Trial Acceleration, which pleasingly met its EBITDA-based earn out target for the financial year ending 31 December 2021.
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Solid progress was made in all areas of the business, with material contribution during the period from two statistical computing environment (SCE) solution lines of business:
Solid progress was made in all areas of the business, with material contribution during the period from two statistical computing environment (SCE) solution lines of business:


· the productised integration of leading technology tools, hosted by Instem for small to mid-sized pharmaceutical companies and CROs
* the productised integration of leading technology tools, hosted by Instem for small to mid-sized pharmaceutical companies and CROs
 
* large custom projects for bigger clients
· large custom projects for bigger clients


Focus and investment increased during the year on Aspire, a next generation clinical analytics framework of flexible components that can be leveraged in both the productised or custom approaches to building and deploying SCE solutions. Aspire is expected to significantly speed up the time to deployment of a new SCE solution, to provide recurring SaaS revenue and, ultimately, to result in higher project margins.
Focus and investment increased during the year on Aspire, a next generation clinical analytics framework of flexible components that can be leveraged in both the productised or custom approaches to building and deploying SCE solutions. Aspire is expected to significantly speed up the time to deployment of a new SCE solution, to provide recurring SaaS revenue and, ultimately, to result in higher project margins.
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With some Covid-related relaxation by the European and Canadian regulatory authorities of the requirement for submission of anonymised clinical trial data for each approved new drug, we experienced lower than expected demand for our clinical trial transparency products and outsourced services, however this remains a promising regulatory mandated growth opportunity.
With some Covid-related relaxation by the European and Canadian regulatory authorities of the requirement for submission of anonymised clinical trial data for each approved new drug, we experienced lower than expected demand for our clinical trial transparency products and outsourced services, however this remains a promising regulatory mandated growth opportunity.


'''Financial Review'''


Financial Review
'''Key Performance Indicators (KPIs)'''


== Key Performance Indicators (KPIs) ==
The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available for the working capital requirements of the Group. Primary KPIs at the year-end were:
The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available for the working capital requirements of the Group. Primary KPIs at the year-end were:
{| class="wikitable"
{| class="wikitable"
Line 253: Line 237:


Earnings before interest, tax, depreciation, amortisation and non-recurring items (Adjusted EBITDA) increased by 41% to £8.3m (2020: £5.9m). For this measure of earnings, the margin as a percentage of revenue decreased in the period to 17.9% from 21% in 2020, entirely due to the impact of the lower than Instem average margins of d-wise and PDS.  
Earnings before interest, tax, depreciation, amortisation and non-recurring items (Adjusted EBITDA) increased by 41% to £8.3m (2020: £5.9m). For this measure of earnings, the margin as a percentage of revenue decreased in the period to 17.9% from 21% in 2020, entirely due to the impact of the lower than Instem average margins of d-wise and PDS.  


Non-recurring costs in the period were £1.29m (2020: £0.06m), consisting of £0.1m for legal expenses associated with historical contract disputes, £0.17m for share based payments and £1.02m of acquisition costs. Non-recurring income of £0.8m ($1.1m) relates to US federal government COVID-19 support loans, which were forgiven during 2021, refer to note 3 for non-recurring items.
Non-recurring costs in the period were £1.29m (2020: £0.06m), consisting of £0.1m for legal expenses associated with historical contract disputes, £0.17m for share based payments and £1.02m of acquisition costs. Non-recurring income of £0.8m ($1.1m) relates to US federal government COVID-19 support loans, which were forgiven during 2021, refer to note 3 for non-recurring items.
Line 272: Line 255:


Finally on 1 September 2021, Instem announced the acquisition of PDS Pathology Data Systems Ltd ("PDS"), a direct competitor in the life sciences space with headquarters in Switzerland and offices in the United States and Japan. The Initial Consideration was satisfied by CHF 4.7m in cash (c. £3.7m) and CHF 3.5m (c. £2.8m) via the issuance of 359,157 new ordinary shares of 10p each in Instem plc.  The cash payment, loan repayments and other net liabilities payments are being funded from the Group's existing financial resources. PDS acquisition enables Instem to concentrate investment on a single line of SEND and preclinical study management products, removing unnecessary duplication in the market. The combination of technologies and highly experienced teams will enable the Group to enhance the development and delivery of existing and new solutions that provide higher value to its clients.
Finally on 1 September 2021, Instem announced the acquisition of PDS Pathology Data Systems Ltd ("PDS"), a direct competitor in the life sciences space with headquarters in Switzerland and offices in the United States and Japan. The Initial Consideration was satisfied by CHF 4.7m in cash (c. £3.7m) and CHF 3.5m (c. £2.8m) via the issuance of 359,157 new ordinary shares of 10p each in Instem plc.  The cash payment, loan repayments and other net liabilities payments are being funded from the Group's existing financial resources. PDS acquisition enables Instem to concentrate investment on a single line of SEND and preclinical study management products, removing unnecessary duplication in the market. The combination of technologies and highly experienced teams will enable the Group to enhance the development and delivery of existing and new solutions that provide higher value to its clients.


The financial obligations associated with these acquisitions during 2022 and 2023 are deferred and contingent consideration payments of £6.5m and £5.3m respectively, in a combination of cash and shares. The contingent consideration reflects management's estimate that the entities will achieve the profitability target. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be settled in a combination of cash and shares of Instem plc at the discretion of the Group. However, the amount of £0.8m which is part of the d-wise deferred consideration will be payable in shares.
The financial obligations associated with these acquisitions during 2022 and 2023 are deferred and contingent consideration payments of £6.5m and £5.3m respectively, in a combination of cash and shares. The contingent consideration reflects management's estimate that the entities will achieve the profitability target. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be settled in a combination of cash and shares of Instem plc at the discretion of the Group. However, the amount of £0.8m which is part of the d-wise deferred consideration will be payable in shares.
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At 31 December 2021, the IAS19 accounting pension deficit decreased by £1.9m to £2.0m (2020: £3.9m). The agreed Group cash contributions currently approximate to £0.6m per annum, payable through to September 2026. The deficit at the 2021 year-end of £2.0m (2020: £3.9m) is represented by the fair value of assets of £14.0m (2020: £12.5m) and the present value of funded obligations of £16.0m (2020: £16.4m), after applying a discount rate of 1.90% (2020: 1.40%).
At 31 December 2021, the IAS19 accounting pension deficit decreased by £1.9m to £2.0m (2020: £3.9m). The agreed Group cash contributions currently approximate to £0.6m per annum, payable through to September 2026. The deficit at the 2021 year-end of £2.0m (2020: £3.9m) is represented by the fair value of assets of £14.0m (2020: £12.5m) and the present value of funded obligations of £16.0m (2020: £16.4m), after applying a discount rate of 1.90% (2020: 1.40%).


== Alternative performance measures ==
'''Alternative performance measures'''
 


This Annual Report and Accounts contains certain financial alternative performance measures ("APMs") that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures by other companies.
This Annual Report and Accounts contains certain financial alternative performance measures ("APMs") that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures by other companies.


The table below provides the data for certain performance measures mentioned above:]
The table below provides the data for certain performance measures mentioned above:]
{| class="wikitable"
{| class="wikitable"
|+
|+
|
!
|
!2021
|2021


£000
£000
|2020
!2020


£000
£000
|-
|
|
|
|
|-
|-
|Annual support fees
|Annual support fees
|
|14,378
|14,378
|8,917
|8,917
|-
|-
|SaaS subscription and support fees
|SaaS subscription and support fees
|
|9,704
|9,704
|8,024
|8,024
|-
|
|
|
|
|-
|-
|Recurring revenue
|Recurring revenue
|
|24,082
|24,082
|16,941
|16,941
|-
|
|
|
|
|-
|-
|Licence fees
|Licence fees
|
|4,597
|4,597
|3,477
|3,477
|-
|-
|Professional services
|Professional services
|
|3,651
|3,651
|1,603
|1,603
|-
|-
|Technology enabled outsourced services
|Technology enabled outsourced services
|
|6,378
|6,378
|6,196
|6,196
|-
|-
|Consultancy services
|Consultancy services
|
|7,309
|7,309
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|-
|
|
|
|
|-
|-
|Total revenue
|Total revenue
|
|46,017
|46,017
|28,217
|28,217
Line 501: Line 452:
|26,724
|26,724
|}
|}
Post Period-End
'''Post Period-End'''


An historical contractual licence dispute, which does not affect the ongoing operations of the Group, was heard by a German court on 17 March 2022 and the official outcome is awaited. The Group has been defending the action and strongly believes that the claim should be dismissed.  
An historical contractual licence dispute, which does not affect the ongoing operations of the Group, was heard by a German court on 17 March 2022 and the official outcome is awaited. The Group has been defending the action and strongly believes that the claim should be dismissed.  
Line 507: Line 458:
Notwithstanding this, the cost provision of £0.25m made in 2017 has been maintained in the 2021 financial statements. As the potential financial outcome cannot yet be determined with any certainty the Board has concluded that the £0.25m provision was appropriate at 31 December 2021. To date all legal expenses have been expensed.
Notwithstanding this, the cost provision of £0.25m made in 2017 has been maintained in the 2021 financial statements. As the potential financial outcome cannot yet be determined with any certainty the Board has concluded that the £0.25m provision was appropriate at 31 December 2021. To date all legal expenses have been expensed.


Post Period-End
On 8 April 2022, the Group signed a new financing arrangement which consists of a committed facility of £10.0m 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.
 
'''Outlook'''


An historical contractual licence dispute, which does not affect the ongoing operations of the Group, was heard by a German court on 17 March 2022 and the official outcome is awaited. The Group has been defending the action and strongly believes that the claim should be dismissed.  
The performance during the year highlighted our resilience - especially given the COVID-19 backdrop, and I would like to thank all of our staff for their continued efforts and hard work. Our proven model continues to generate strong cash flows while the combination of increasing demand for regulatory-backed solutions and a growing demand for artificial intelligence and in silico solutions in the drug R&D process underpins our confidence in further leveraging our software and service portfolio. As such, we now have the platform in place to capitalise on the various opportunities ahead of us and we look forward to reporting further progress as we continue to execute our growth strategy.
 
In common with other businesses, we have seen wage inflation in recent months and, accordingly, we are moderating our profit expectations for the current year ahead of price rises on contract renewals flowing through positively to revenue. Importantly, we already have good visibility for the current year with growing recurring SaaS and Annual Support revenues and a strong pipeline.
 
The recent acquisitions of The Edge, d-wise and PDS highlight our ability to add scale and leverage existing customer relationships with a view to further enhancing earnings, while providing a strong platform for continued growth.  We look forward to advancing further acquisition opportunities after consolidating the 2021 additions.
 
Phil Reason
 
Chief Executive
 
26 April 2022
 
 
{| class="wikitable"
|+CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
|
|
== Note ==
|Year ended
 
31 December 2021
 
£000
|Year ended
 
31 December 2020
 
£000
|-
|REVENUE  
|
== 2 ==
|46,017
|28,217
|-
|Employee benefits expense
|
|(26,918)
|(16,508)
|-
|Other expenses
|
|(10,491)
|(5,790)
|-
|Net impairment (losses)/gains on financial assets
|
|(358)
|<nowiki>-</nowiki>
|-
|EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS (ADJUSTED EBITDA)
|
 
 
|
 
 
8,250
|
 
 
5,919
|-
|Depreciation
|
|(312)
|(138)
|-
|Amortisation of intangibles arising on acquisitions
|
|(1,563)
|(664)
|-
|Amortisation of internally generated intangibles
|
|(851)
|(736)
|-
|Depreciation of right of use assets
|
== 7 ==
|(945)
|(572)
|-
|OPERATING PROFIT BEFORE NON-RECURRING COSTS
|
|4,579
|3,809
|-
|Non-recurring costs
|
== 3 ==
|(1,286)
|(606)
|-
|Non-recurring income
|
== 3 ==
|805
|<nowiki>-</nowiki>
|-
|OPERATING PROFIT AFTER NON-RECURRING COSTS
|
|4,098
|3,203
|-
|Finance income
|
== 4 ==
|30
|38
|-
|Finance costs
|
== 5 ==
|(1,144)
|(692)
|-
|PROFIT BEFORE TAXATION
|
|2,984
|2,549
|-
|Taxation
|
== 6 ==
|(1,306)
|(275)
|-
|PROFIT FOR THE YEAR
|
|1,678
|2,274
|-
|OTHER COMPREHENSIVE INCOME/ (EXPENSE)
|
|
|
|-
|Items that will not be reclassified to profit and loss account:
|
|
|
|-
|Actuarial gain/(loss) on net defined benefit liability
|
|1,375
|(2,537)
|-
|Deferred tax on actuarial loss/ gain
|
|(140)
|518
|-
|Deferred tax on share options
|
|<nowiki>-</nowiki>
|322
|-
|
|
|1,235
|(1,697)
|-
|Items that may be reclassified to profit and loss account:
|
|
|
|-
|Exchange differences on translating foreign operations
|
|(294)
|10
|-
|
|
|_______
|_______
|-
|
 
 
OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR
|
|
 
 
941
|
 
 
(1,687)
|-
|
|
|_______
|_______
|-
|
 
 
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
|
|
 
 
2,619
|
 
 
587
|-
|
 
 
PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY
|
|
 
 
1,678
|
 
 
2,274
|-
|TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY
|
|
 
 
2,619
|
 
 
587
|-
|Earnings per share
|
|
|
|-
|Basic
|
== 8 ==
|7.8
|12.3
|-
|Diluted
|
== 8 ==
|7.4
|11.6
|}
 
 
{| class="wikitable"
|+CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2021
|
|
 
 
  2021
|
 
 
  2020
|-
|
|£000
|£000
|-
|ASSETS
|
|
|-
|NON-CURRENT ASSETS
|
|
|-
|Intangible assets
|58,311
|18,023
|-
|Property, plant and equipment
|
|238
|-
|Right of use assets
|2,077
|1,742
|-
|Finance lease receivables
|85
|128
|-
|TOTAL NON-CURRENT ASSETS
|61,065
|20,131
|-
|CURRENT ASSETS
|
|
|-
|Inventories
|64
|50
|-
|Trade and other receivables
|14,852
|6,093
|-
|Finance lease receivables
|44
|41
|-
|Tax receivable
|130
|724
|-
|Cash and cash equivalents
|15,021
|26,724
|-
|TOTAL CURRENT ASSETS
|30,111
|33,632
|-
|TOTAL ASSETS
|91,176
|53,763
|-
|LIABILITIES
|
|
|-
|CURRENT LIABILITIES
|
|
|-
|Trade and other payables
|5,723
|2,958
|-
|Deferred income
|18,935
|9,878
|-
|Financial liabilities
|6,612
|268
|-
|Lease liabilities
|1,077
|608
|-
|TOTAL CURRENT LIABILITIES
|32,347
|13,712
|-
|NON-CURRENT LIABILITIES
|
|
|-
|Financial liabilities
|4,728
|1,131
|-
|Pension obligations
|2,014
|3,868
|-
|Provision for liabilities
|291
|250
|-
|Lease liabilities
|1,248
|1,476
|-
|Deferred tax liabilities
|3,247
|90
|-
|TOTAL NON-CURRENT LIABILITIES
|11,528
|6,815
|-
|TOTAL LIABILITIES
|43,875
|20,527
|-
|EQUITY
|
|
|-
|Share capital
|2,219
|2,048
|-
|Share premium
|28,191
|28,172
|-
|Merger reserve
|12,104
|2,432
|-
|Share based payment reserve
|2,294
|930
|-
|Translation reserve
|(202)
|92
|-
|Retained earnings
|2,695
|(438)
|-
|TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
|


Notwithstanding this, the cost provision of £0.25m made in 2017 has been maintained in the 2021 financial statements. As the potential financial outcome cannot yet be determined with any certainty the Board has concluded that the £0.25m provision was appropriate at 31 December 2021. To date all legal expenses have been expensed.


47,301
|




33,236
|-
|TOTAL EQUITY AND LIABILITIES
|91,176
|53,763
|}





Revision as of 21:31, 2 September 2022

Summary

Unaudited Results for the Year Ended 31 December 2021 & Investor Presentation

Instem plc (AIM: INS), a leading provider of IT solutions to the global life sciences market, announces its unaudited results for the year ended 31 December 2021 (the "Period").

Financial Highlights:

  • Revenues increased 63% to £46.0m (2020: £28.2m)
    • Recurring revenue (annual support and SaaS) increased 43% to £24.1m (2020: £16.9m) with SaaS revenues increasing 21% to £9.7m (2020: £8m)
    • Organic revenue growth of 7% to £30.1m (2020: £28.2m)
    • Organic constant currency revenue growth of 12-%
    • SaaS Annual Recurring Revenue ("ARR") of £11.5m at 1 January 2022
  • Adjusted EBITDA* of £8.3m (2020: £5.9m)
  • Reported profit before tax of £3.0m (2020: profit of £2.5m)
  • Adjusted profit before tax** of £5.0m (2020: £4.0m)
  • Fully diluted earnings per share of 7.4p (2020: 11.6p earnings per share)
  • Adjusted fully diluted earnings per share** of 16.3p (2020: 19.1p)
  • Gross cash balance at 31 December 2021 of £15.0m (2020: £26.7m, reflecting the equity raise in July 2020 to fund the 2021 acquisitions).

For an explanation of the alternative performance measures in the report, please refer to page 12

*Earnings before interest, tax, depreciation, amortisation and non-recurring items.

**After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items and amortisation of intangibles on acquisitions.

Operational Highlights

  • Strong organic growth with little impact from COVID-19
  • New business revenue came from both new and existing clients
  • Further expansion of footprint in the Asia-Pacific region
  • Continued transition to the SaaS model further increased recurring revenue and earnings visibility
  • Transformed the scale and reach of the business through acquisitions of:
    • The Edge Software Consultancy ("The Edge")
    • d-Wise Technologies Inc ("d-wise")
    • PDS Pathology Data Systems Ltd ("PDS")

Post Period-End Highlights

  • New banking facility finalised with HSBC of up to £20m, £10m of which is committed
  • Earn outs met in full for d-wise and The Edge (PDS has no earn out provision)
  • No known exposure to Russia or Ukraine

Phil Reason, CEO, commented: "The performance during the year highlighted our resilience - especially given the COVID-19 backdrop, and I would like to thank all of our staff for their continued efforts and hard work. Our proven model continues to generate strong cash flows while the combination of increasing demand for regulatory-backed solutions and a growing demand for artificial intelligence and in silico solutions in the drug R&D process underpins our confidence in further leveraging our software and service portfolio. As such, we now have the platform in place to capitalise on the various opportunities ahead of us and we look forward to reporting further progress as we continue to execute our growth strategy.

In common with other businesses, we have seen wage inflation in recent months and, accordingly, we are moderating our profit expectations for the current year ahead of price rises on contract renewals flowing through positively to revenue. Importantly, we already have good visibility for the current year with growing recurring SaaS and Annual Support revenues and a strong pipeline.

The recent acquisitions of The Edge, d-wise and PDS highlight our ability to add scale and leverage existing customer relationships with a view to further enhancing earnings, while providing a strong platform for continued growth.  We look forward to advancing further acquisition opportunities after consolidating the 2021 additions."

Investor Presentation: 16:00 today

Management will be providing a presentation and hosting an Investor Q&A session on the results and future prospects today at 16:00, through the digital platform Investor Meet Company. Investors can sign up for free and add to attend the presentation via the following link https://www.investormeetcompany.com/instem-plc/register-investor.

Questions can be submitted pre event and at any time during the live presentation via the Investor Meet Company Platform.

Details

Chairman's Statement

The achievements of the Company in the year have been outstanding. Not only has our operational performance been exceptional but the business has also accomplished a fundamental strategic shift in its scale and reach as a result of the completion of three important acquisitions. As a consequence, our standing within the wider industry has been significantly enhanced.

In July 2020 we raised funds to acquire businesses that we believed would be transformational to the company by extending our 'footprint' in the life sciences R&D space, providing a stronger platform for long term growth. I believe that we can say that this has been achieved. The acquisitions of d-wise and The Edge have significantly extended our product and service portfolio, whilst the acquisition of PDS ensures that our position in the preclinical space is unrivalled.

Whilst the integration of the acquired businesses is ongoing, we have already seen the benefits of their skillsets and teams operating within the enlarged Group, providing a significant contribution to our overall financial performance in the year.

Operations

The Company's strong infrastructure and ability to operate remotely provided essential resilience in our business operations as the pandemic continued. We are delighted with and thankful for the team's efforts throughout this challenging period.

We have made notable progress on a number of key metrics during the Period. In particular:

  • Continued growth in SaaS-based revenues (increased 21% to £9.7m) both through new business wins and via the ongoing conversion of existing clients
  • Total Group revenues increased 63% - including the partial year impact of the acquisitions completed during the period
  • Adjusted EBITDA increased 39%
  • Net cash generated from operations of £10.3m

Corporate Enhancement

We were delighted to welcome Mr Riaz Bandali to the Board in December 2021. Riaz has spent his entire career in the healthcare and life sciences industries in a variety of strategic, commercial and operational roles at senior level, also including exposure to fundraising and M&A activity and, as such, brings a wealth of relevant experience and contacts in the North American and wider life sciences industry. We are also continuing with our efforts to identify a further suitable Independent NED candidate and look forward to updating shareholders in due course.

We were also delighted to appoint Stifel  as Joint broker alongside/with Singer Capital Markets to enhance our presence, both in the North American and European investor markets.

Looking Forward

In the short term, we are confident that we can continue to execute our growth plans for the Group. That said, labour cost inflation, in particular, has significantly increased in recent times. As a result, although anticipating material improvement over 2021, we are prudently moderating our profit expectations for the current year, whilst planning to regain ground in the following year, as justifiable price increases flow through to revenue.

The three acquisitions, completed in the year, have extended our reach from discovery to clinical trials across the drug discovery and development lifecycle. As a result, the Company is now closer to becoming a one-stop shop for life sciences companies looking for long term partnerships to assist them over the drug discovery and development landscape.

Whilst our near-term focus remains on completing the successful integration of the recently acquired businesses, the Board believes that this new platform will create substantial opportunities for further development of the business. These include:

  • Organic revenue growth from additional market penetration, cross-selling and the introduction of new products and services
  • Margin improvement through conversion to SaaS deployment and leveraging our global infrastructure
  • Accretive M&A and strategic partnerships in existing markets, as well as entry into related adjacent areas.

In summary, we believe that the momentum and platform we now have in place ensures that the Company is well positioned for continued success over the longer term.

David Gare

Non-Executive Chairman

26 April 2022

Chief Executive's Report

Strategic Development

During 2021, the Group materially advanced its ability to pursue its strategic thesis of providing data driven, "in silico" alternatives to traditional client experimental processes with the aim of radically reducing the cost and time of life sciences R&D. The strategy is based on leveraging trusted client and regulatory relationships and our intimate understanding of complex scientific data, established by providing a broad portfolio of market leading IT solutions that optimize today's life sciences R&D processes, from early discovery to late-stage clinical trials.  The acquisition of The Edge has strengthened our position in discovery and d-wise adds a well-respected market leader in the analysis and de-identification of clinical trial data.  Instem's already strong market presence in non-clinical development was enhanced by the acquisition of long-term competitor PDS and we are now well positioned to provide innovative solutions across the entire R&D continuum.

Organic growth remained strong, with retention of recurring SaaS and Annual Support revenue once again ahead of our 98% key performance indicator and new business win rates confirming our market leadership across our broad portfolio.  Although the increasing rate of SaaS deployment, for existing and new clients, moderated short term revenue growth, due to the switch from perpetual license revenue recognition to longer term subscription rentals, overall organic revenue growth remained strong.

Market Review

The market backdrop continues to be favourable for the Group given global population growth and life expectancy underpinning increased demand for successful innovation in life sciences. Increasing amounts of money are being invested in the biotech industry with the pharmaceuticals sector investing heavily in drug development, underpinning a strong pipeline for Instem. The market dynamics were highlighted further by the ongoing COVID-19 pandemic, which presented a number of new opportunities as R&D increased with all the major companies focusing on developing vaccines or therapies.

In the pharmaceutical industry, which represents the largest proportion of Instem's revenue, we refer again to the Pharma R&D Annual Review, the 2022 version of which was released by Pharma Intelligence in March this year. This report shows that the industry grew strongly in the last 12 months with an 8.2% increase (2020: 4.8%) in the total number of drugs in the regulatory stages of global R&D, continuing a multi-year growth trend that shows no sign of abating. Most relevant to Instem are the increase in the number of drugs at the preclinical (or non-clinical) phase of drug development of 11.0% (2020: 6.0%) and clinical phases 1-3 where there was an 8.3% increase (2020: 3.6%), as these areas account for much of our business.

The constant development of the drug discovery pipeline continues to drive demand for Instem's solutions - which enable companies to provide faster and cheaper routes to market for their life changing products. Importantly, the regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND") continues to underpin longer term opportunity and visibility in the non-clinical segment. Similar regulatory standards help with demand for our clinical trial analysis solutions and mandatory provision of de-identified clinical trial data for European and Canadian regulatory authority approved drugs enhances demand for our clinical trial transparency software and services.

Business Performance

Study Management

Performance here was very pleasing, with revenue growth compared with the prior period of 35%, with 17% organic growth and 17% from acquisitions, including 10 months contribution from The Edge and 4 months from PDS.

The 11% increase in the number of drugs in the non-clinical stage of development has supported significant growth for the contract research organizations (CROs) specializing in this area and they in turn have been purchasing additional users for our products, additional product modules that they had not yet licensed and services to support their successful deployment and use of our solutions.

The majority of the revenue associated with orders in excess of £2.7m, announced for one of our largest CRO clients on 15 December 2020 and in our 14 January 2021 Trading Update, was recognized in 2021 and we continue to collaborate extensively with this customer as they look for competitive advantage through technology investment. Most of this additional revenue was study management related but also included new SEND related capabilities, much of which will benefit the wider SEND community.

The acquisition of The Edge has broadened Instem's reach into the Discovery Study Management market, providing scope for increased cross-selling particularly in the Drug Metabolism & Pharmacokinetics (DMPK) field. The Edge extends the Company's reach within existing and new clients and enhances our technology offering.  Provided predominantly on a subscription basis, The Edge has helped to expand our recurring revenue.

In Silico Solutions

Following a slow H1 2021, as a result of the pandemic, demand picked up during H2.  This is an area where we have historically generated significant market awareness and sales pipeline at scientific conferences, as both Instem staff and reference clients presented a new, "disruptive" approach to the established method of assessing the potential safety issues of modulating a biological target thought to offer therapeutic benefit.  We were eagerly awaiting the post COVID-19 return to in person conferences, which were further delayed by the Delta and Omicron variants.  Post period end, in late March 2022 we attended the largest event of this type, the "Society of Toxicology" annual meeting, and were extremely encouraged by the strong interest in our In Silico solutions.

In November 2021 the Company announced the release of the latest edition of its Leadscope Model Applier computational toxicology software solution. This release included a comprehensive package of new and updated models to meet the growing market demand for in silico solutions, which are often heavily encouraged and supported by the global regulatory authorities.

Regulatory Solutions

Every drug company is required to submit non-clinical data in the SEND format to the FDA (Food and Drug Administration) as part of the processes for testing and getting approval for a new drug. The combination of the industry's focus on addressing a continuing backlog of SEND conversion work, in addition to the standard being extended to new study types, provides a solid platform for continued growth.

Instem's technology creates, manages and visualizes SEND datasets, while the Group also provides technology- enabled outsourced services, enabling customers to make FDA submissions with confidence.

The industry is increasingly looking to unlock silos of information and importantly, customers are starting to contemplate Instem's SEND solutions as a consistent approach to leveraging their valuable historic studies for more efficient and effective research. This is providing a growing source of revenue for the Group, highlighted through a £0.7m top-30 pharmaceutical company contract for conversion of historical studies to the SEND format, and subsequently the data warehouse and exploration technology platform to house this data, both won during the Period.

The acquisition of competitor PDS allows for greater industry standardization on Instem's SEND technology platform and has brought a further 17 US-based SEND consultants to an outsourced services team of 72 people, 38 of whom are based in India.  Instem's expertise, capacity, and business in this area is unrivalled.

Clinical Trial Acceleration

The acquisition of d-wise on 1 April 2021 led to the creation of a fourth business unit, Clinical Trial Acceleration, which pleasingly met its EBITDA-based earn out target for the financial year ending 31 December 2021.

Solid progress was made in all areas of the business, with material contribution during the period from two statistical computing environment (SCE) solution lines of business:

  • the productised integration of leading technology tools, hosted by Instem for small to mid-sized pharmaceutical companies and CROs
  • large custom projects for bigger clients

Focus and investment increased during the year on Aspire, a next generation clinical analytics framework of flexible components that can be leveraged in both the productised or custom approaches to building and deploying SCE solutions. Aspire is expected to significantly speed up the time to deployment of a new SCE solution, to provide recurring SaaS revenue and, ultimately, to result in higher project margins.

With some Covid-related relaxation by the European and Canadian regulatory authorities of the requirement for submission of anonymised clinical trial data for each approved new drug, we experienced lower than expected demand for our clinical trial transparency products and outsourced services, however this remains a promising regulatory mandated growth opportunity.

Financial Review

Key Performance Indicators (KPIs)

The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available for the working capital requirements of the Group. Primary KPIs at the year-end were:

2021

£000

2020

£000


%Change

Totalrevenue 46,017 28,217 63%
Organic revenue1 * 30,052 28,217 7%
Recurring revenue 1 ** 24,082 16,941 42%
Annual Recurring Revenue 1 28,741 - -
Recurringrevenueasapercentageoftotalrevenue 52% 60% -800bps
Adjusted EBITDA 1 *** 8,250 5,919 39%
AdjustedEBITDAMargin% 17.9% 21.0% -310bps
Cashandcashequivalents 15,021 26,724 (44%)
Organic customer retention rate for recurring SaaS and Annual Support revenue 98% - -

1 For an explanation of the alternative performance measures in the report, please refer to page 12

* Excluding revenue from the new acquired businesses

** Recurring revenue includes Annual support fees and SaaS subscription fees.

*** Earnings before interest, tax, depreciation, amortisation and non-recurring items.

In addition, non-financial KPIs are periodically reviewed and assessed, including customer and staff retention rates.

Instem's revenue model consists of perpetual licence income with annual support and maintenance contracts, professional fees, technology enabled outsourced services fees, SaaS subscriptions and consultancy services.

Total revenues increased by 63% to £46.0m (2020: £28.2m) including The Edge, d-wise and PDS revenue, which were acquired in March, April and September 2021. Total organic revenue increased by 7% to £30.1m (2020: £28.2m). Recurring revenue, comprising Support & Maintenance contracts and SaaS subscriptions, increased during the year by 42% to £24.1m (2020: £16.9m). Recurring revenue as a percentage of total revenue was 52% (2020: 60%). In absolute terms, recurring revenue increased over the year by £7.2m but its percentage of the total decreased due primarily to the addition of d-wise consulting revenue, which is shown as non-recurring.

Revenue from technology enabled outsourced services remained stable at £6.4m (2020: £6.2m). Operating expenses increased by 69% in the period reflecting the ongoing investment in operational teams and mainly the inclusion of The Edge, d-wise and PDS costs. Like-for-like operating costs increased by 7%.

Earnings before interest, tax, depreciation, amortisation and non-recurring items (Adjusted EBITDA) increased by 41% to £8.3m (2020: £5.9m). For this measure of earnings, the margin as a percentage of revenue decreased in the period to 17.9% from 21% in 2020, entirely due to the impact of the lower than Instem average margins of d-wise and PDS.

Non-recurring costs in the period were £1.29m (2020: £0.06m), consisting of £0.1m for legal expenses associated with historical contract disputes, £0.17m for share based payments and £1.02m of acquisition costs. Non-recurring income of £0.8m ($1.1m) relates to US federal government COVID-19 support loans, which were forgiven during 2021, refer to note 3 for non-recurring items.

The reported profit before tax for the year was £3.0m (2020: profit of £2.5m). Adjusted profit before tax (i.e. adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items and amortisation of intangibles on acquisitions) was £5.0m (2020: £4.0m).

The total income tax charge in the year of £1.3m (2020: £0.3m) is an effective tax rate of 43.8% (2020: 10.8%). The increase in the tax charge is mainly due to higher foreign tax payables and the impact on deferred tax of the UK corporation tax rate increase to 25% from April 2023. In the UK, the Group continues to receive additional tax relief on its research and development expenditure, which is expected to continue into future years.

The Group continues to maintain its investment in its product portfolio. Research and development costs incurred during the year were £4.9m (2020: £3.4m), of which £2.2m (2020: £1.2m) was capitalised.

The Group operates internationally and is exposed to foreign currency risk on transactions denominated in a currency other than the functional currency and on the translation of the statement of financial position and statement of comprehensive income of foreign operations into sterling.  The currency that gave rise to this risk in 2021 was primarily from realised US dollars transactions. In 2021, the organic revenue growth excluding the foreign exchange exposure was 12-%. The foreign exchange loss recorded during 2021 was £0.04m (2020: £0.5m) which is composed of realised and unrealised gains/losses.

Basic and diluted earnings per share calculated on an adjusted basis were 17.2p and 16.3p respectively (2020: 20.4p basic and 19.1p diluted). The reported basic and diluted earnings per share were 7.8p and 7.4p respectively (2020: 12.3p basic and 11.6p diluted).

On 1 March 2021, Instem announced the acquisition of The Edge, a study management software provider based in the UK. The Edge is focused on improving the efficiency of early-stage drug R&D, improving productivity and ensuring high-quality data capture. The consideration payable is up to £8.5m, payable as £6.0m initially, satisfied by £4.0m in cash from existing reserves and £2.0m via the issuance of 391,920 new ordinary shares in Instem plc, £0.5m of deferred consideration and up to a further £2.0m payable contingent on The Edge's future trading performance, both amounts payable in cash. In addition, the amount of £1.5m was paid as a net cash adjustment after deducting the estimated debt at the point of the acquisition.

On 1 April 2021, Instem acquired US-based clinical trial technology & consulting leader d-wise Technologies, Inc. (d-wise). D-wise adds another market leading position to the Group in an attractive adjacent area of clinical trial analysis and submission, with good future visibility through recurring revenue streams and already contracted, high value consultancy projects. The combined strength of Instem & d-wise positions the enlarged Group as the foremost authority and driving force in generating, analysing and leveraging data from Discovery through late-stage Clinical Trials. The total consideration is up to $31.5m comprising $20m (c. £14,5m) on completion, $8.5m (c. £6,2m) of deferred consideration and up to a further $3m (c. £2,2m) which is payable contingent upon the future financial performance of d-wise. The initial consideration on completion was satisfied by $13m (c. £9,4m)  in cash and $7m (c. £9,8m) via the issuance of 868,203 new ordinary shares of 10p each in Instem plc. The initial cash payment was funded from the Group's existing financial resources.

Finally on 1 September 2021, Instem announced the acquisition of PDS Pathology Data Systems Ltd ("PDS"), a direct competitor in the life sciences space with headquarters in Switzerland and offices in the United States and Japan. The Initial Consideration was satisfied by CHF 4.7m in cash (c. £3.7m) and CHF 3.5m (c. £2.8m) via the issuance of 359,157 new ordinary shares of 10p each in Instem plc.  The cash payment, loan repayments and other net liabilities payments are being funded from the Group's existing financial resources. PDS acquisition enables Instem to concentrate investment on a single line of SEND and preclinical study management products, removing unnecessary duplication in the market. The combination of technologies and highly experienced teams will enable the Group to enhance the development and delivery of existing and new solutions that provide higher value to its clients.

The financial obligations associated with these acquisitions during 2022 and 2023 are deferred and contingent consideration payments of £6.5m and £5.3m respectively, in a combination of cash and shares. The contingent consideration reflects management's estimate that the entities will achieve the profitability target. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be settled in a combination of cash and shares of Instem plc at the discretion of the Group. However, the amount of £0.8m which is part of the d-wise deferred consideration will be payable in shares.

The period saw again strong net cash generated from operations of £10.3m (2020: £7.4m), largely due to cash inflows from the newly acquired businesses, key contracts, outsourced services and effective working capital management. The Group's cash resources were used to accelerate the Group's acquisition strategy with the acquisition of the Edge, d-wise and PDS. The net cash payment for purchasing those subsidiaries was £17.2m (net of cash acquired). 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 during 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 £15.0m.

The latest triennial actuarial valuation of the Group's legacy defined benefit pension scheme as at 5 April 2020, was completed in July 2021. As part of the process, the Group has agreed a revised Schedule of Contributions with the Trustees of the Scheme, which are intended to clear the Scheme deficit by 30 September 2026.

At 31 December 2021, the IAS19 accounting pension deficit decreased by £1.9m to £2.0m (2020: £3.9m). The agreed Group cash contributions currently approximate to £0.6m per annum, payable through to September 2026. The deficit at the 2021 year-end of £2.0m (2020: £3.9m) is represented by the fair value of assets of £14.0m (2020: £12.5m) and the present value of funded obligations of £16.0m (2020: £16.4m), after applying a discount rate of 1.90% (2020: 1.40%).

Alternative performance measures

This Annual Report and Accounts contains certain financial alternative performance measures ("APMs") that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures by other companies.

The table below provides the data for certain performance measures mentioned above:]

2021

£000

2020

£000

Annual support fees 14,378 8,917
SaaS subscription and support fees 9,704 8,024
Recurring revenue 24,082 16,941
Licence fees 4,597 3,477
Professional services 3,651 1,603
Technology enabled outsourced services 6,378 6,196
Consultancy services 7,309 -
Total revenue 46,017 28,217

Recurring revenue is the revenue that annually repeats under contractual arrangement. It highlights how much of the Group's total revenue is secured and anticipated to repeat in future periods, providing a measure of the financial strength of the business.

2021

£000

2020

£000

Total revenue 46,017 28,217
Revenue from the acquisitions (15,965) -
Organic revenue 30,052 28,217

Organic revenue is the revenue excluding the impact of acquisition which highlights the Group's income generated from the primary operations.

2021

£000

2020

£000

Recurring Revenue 24,082
Annual recurring revenue adjustment 4,659
Annual Recurring Revenue 28,741

Annual recurring revenue is the revenue that is annually repeats under contractual arrangement considering also the acquisitions were part of the group for 12 months. The revenue has also been adjusted for new and lost contracts.

2021

£000

2020

£000

EBITDA 7,769 5,313
Nonrecurring cost 1,286 606
Nonrecurring income (805) -
Adjusted EBITDA 8,250 5,919

Adjusted EBITDA is EBITDA plus non-recurring items (as set out in note 3). The same adjustments are also made in determining the adjusted EBITDA margin. Items are only classified as exceptional due to their nature or size, and the Board considers that this metric provides the best measure of assessing underlying trading performance.

2021

£000

2020

£000

Profit before tax 2,984 2,549
Amortisation of intangibles arising on acquisition 1,563 664
Nonrecurring cost 1,286 606
Nonrecurring income (805) -
Intercompany foreign exchange (gain)/loss (18) 208
Adjusted profit before tax 5,010 4,027

Adjusted profit before tax is after adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items and amortisation of intangibles on acquisitions.

The same adjustments are also made in determining adjusted earnings per share ("EPS"). The Board considers this adjusted measure of operating profit provides the best metric of assessing underlying performance.

2021

£000

2020

£000

Weighted average number of shares (000's) 22,719 19,652
Adjusted diluted earnings per share 16.3p 19.1p
Cash at bank 24,019 35,722
Bank overdraft (8,998) (8,998)
Cash balance 15,021 26,724

Post Period-End

An historical contractual licence dispute, which does not affect the ongoing operations of the Group, was heard by a German court on 17 March 2022 and the official outcome is awaited. The Group has been defending the action and strongly believes that the claim should be dismissed.

Notwithstanding this, the cost provision of £0.25m made in 2017 has been maintained in the 2021 financial statements. As the potential financial outcome cannot yet be determined with any certainty the Board has concluded that the £0.25m provision was appropriate at 31 December 2021. To date all legal expenses have been expensed.

On 8 April 2022, the Group signed a new financing arrangement which consists of a committed facility of £10.0m 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.

Outlook

The performance during the year highlighted our resilience - especially given the COVID-19 backdrop, and I would like to thank all of our staff for their continued efforts and hard work. Our proven model continues to generate strong cash flows while the combination of increasing demand for regulatory-backed solutions and a growing demand for artificial intelligence and in silico solutions in the drug R&D process underpins our confidence in further leveraging our software and service portfolio. As such, we now have the platform in place to capitalise on the various opportunities ahead of us and we look forward to reporting further progress as we continue to execute our growth strategy.

In common with other businesses, we have seen wage inflation in recent months and, accordingly, we are moderating our profit expectations for the current year ahead of price rises on contract renewals flowing through positively to revenue. Importantly, we already have good visibility for the current year with growing recurring SaaS and Annual Support revenues and a strong pipeline.

The recent acquisitions of The Edge, d-wise and PDS highlight our ability to add scale and leverage existing customer relationships with a view to further enhancing earnings, while providing a strong platform for continued growth.  We look forward to advancing further acquisition opportunities after consolidating the 2021 additions.

Phil Reason

Chief Executive

26 April 2022


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2021

Note

Year ended

31 December 2021

£000

Year ended

31 December 2020

£000

REVENUE  

2

46,017 28,217
Employee benefits expense (26,918) (16,508)
Other expenses (10,491) (5,790)
Net impairment (losses)/gains on financial assets (358) -
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION AND NON-RECURRING COSTS (ADJUSTED EBITDA)



8,250


5,919

Depreciation (312) (138)
Amortisation of intangibles arising on acquisitions (1,563) (664)
Amortisation of internally generated intangibles (851) (736)
Depreciation of right of use assets

7

(945) (572)
OPERATING PROFIT BEFORE NON-RECURRING COSTS 4,579 3,809
Non-recurring costs

3

(1,286) (606)
Non-recurring income

3

805 -
OPERATING PROFIT AFTER NON-RECURRING COSTS 4,098 3,203
Finance income

4

30 38
Finance costs

5

(1,144) (692)
PROFIT BEFORE TAXATION 2,984 2,549
Taxation

6

(1,306) (275)
PROFIT FOR THE YEAR 1,678 2,274
OTHER COMPREHENSIVE INCOME/ (EXPENSE)
Items that will not be reclassified to profit and loss account:
Actuarial gain/(loss) on net defined benefit liability 1,375 (2,537)
Deferred tax on actuarial loss/ gain (140) 518
Deferred tax on share options - 322
1,235 (1,697)
Items that may be reclassified to profit and loss account:
Exchange differences on translating foreign operations (294) 10
_______ _______


OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR


941


(1,687)

_______ _______


TOTAL COMPREHENSIVE INCOME FOR THE YEAR


2,619


587


PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY


1,678


2,274

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY


2,619


587

Earnings per share
Basic

8

7.8 12.3
Diluted

8

7.4 11.6


CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2021


  2021


  2020

£000 £000
ASSETS
NON-CURRENT ASSETS
Intangible assets 58,311 18,023
Property, plant and equipment 238
Right of use assets 2,077 1,742
Finance lease receivables 85 128
TOTAL NON-CURRENT ASSETS 61,065 20,131
CURRENT ASSETS
Inventories 64 50
Trade and other receivables 14,852 6,093
Finance lease receivables 44 41
Tax receivable 130 724
Cash and cash equivalents 15,021 26,724
TOTAL CURRENT ASSETS 30,111 33,632
TOTAL ASSETS 91,176 53,763
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 5,723 2,958
Deferred income 18,935 9,878
Financial liabilities 6,612 268
Lease liabilities 1,077 608
TOTAL CURRENT LIABILITIES 32,347 13,712
NON-CURRENT LIABILITIES
Financial liabilities 4,728 1,131
Pension obligations 2,014 3,868
Provision for liabilities 291 250
Lease liabilities 1,248 1,476
Deferred tax liabilities 3,247 90
TOTAL NON-CURRENT LIABILITIES 11,528 6,815
TOTAL LIABILITIES 43,875 20,527
EQUITY
Share capital 2,219 2,048
Share premium 28,191 28,172
Merger reserve 12,104 2,432
Share based payment reserve 2,294 930
Translation reserve (202) 92
Retained earnings 2,695 (438)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT


47,301


33,236

TOTAL EQUITY AND LIABILITIES 91,176 53,763



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.

Source(s)

"Final Results" — Instem plc, 26th April 2022.

Additional information

Which is the main investment that this report is about? Main investment::Instem plc