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Audited Full Year Results for the year ended 31 December 2019

/EIN News/ -- PRESS RELEASE

Audited Full Year Results for the year ended 31 December 2019

Revenue £68.3m (up 26.1%)

Adjusted EBITDA £12.5m (up from £2.3m in 2018)

Order book of future contracted revenue £124.1 million (up 13.6%)

New £30m credit facility

Guildford, UK25 March 2020: Ergomed plc (LSE: ERGO) ('Ergomed' or the 'Company'), a company focused on providing specialised services to the pharmaceutical industry, today announces its audited Full Year Results for the year ended 31 December 2019.

Selected Financial Highlights

Audited
Figures in £ millions, unless otherwise stated
 

Full year
2019
 

 

Full year
2018
%Change
Total Revenue 68.3 54.1 +26.1%
       
Gross Profit 29.5 19.3 +53.3%
Gross Margin 43.3% 35.6%  
       
Adjusted EBITDA 1 12.5 2.3 +454.6%
Exceptional Items (2.4) (8.5)  
       
Cash and Cash Equivalents 14.3 5.2 +174.8%
       
Order book at 31 December 124.1 109.2 +13.6%

Dr Miroslav Reljanović, Executive Chairman of Ergomed, said: “2019 has been a transformational year for Ergomed, delivering strong financial results and executing our focused strategy to become a leading global provider of specialist services to the pharmaceutical industry. We performed strongly across the business and the post year-end acquisition of Ashfield Pharmacovigilance Inc was a major strategic step for Ergomed in the US and in expanding our global presence. A substantial improvement in our profitability and cash resources, our significantly increased order book and new credit facility position Ergomed with financial resilience and a solid platform from which to achieve growth over the long term.

“The Group is monitoring closely the rapid development of the coronavirus outbreak. COVID-19 represents an unprecedented global healthcare challenge and we are proud to have been able to so rapidly play an integral role in establishing a clinical trial with a hospital at the heart of the outbreak in Bergamo, Italy. We hope we will be able to bring our expertise and proven capabilities to bear in advancing drug development in the field and improving outcomes for patients.”

Key Financial Highlights

  • Revenue of £68.3 million increased by 26.1% on a comparable basis (2018: £54.1 million)
    • Revenue growth in Pharmacovigilance (PV) up 28.6% to £35.4 million (2018: £27.5 million)
    • Revenue growth in Clinical Research Outsourcing (CRO) up 23.6% to £32.9 million (2018: £26.6 million)
  • Gross profit up 53% to £29.5 million (2018: £19.3 million)
  • Adjusted EBITDA 1 of £12.5 million (2018: £2.3 million)
  • Basic EPS of 12.0p (2018: loss of 20.0p)
  • Cash and cash equivalents up 174.8% to £14.3 million at 31 December 2019 (31 December 2018: £5.2 million)
  • Order book of £124.1 million future contracted revenue up 13.6% at 31 December 2019 (31 December 2018: £109.2 million)

            
Operational Highlights Including Post Year-End

  • Targeted services business strategy around our core expertise has generated strong growth across the business
  • Strengthened management team and Board through the appointment of senior leaders with significant industry experience and proven track records in building international businesses
  • Continued focus on business development and cross-selling opportunities has resulted in double digit order book growth and enhanced confidence in the revenue pipeline for 2020
  • Post year-end acquisition of Ashfield Pharmacovigilance Inc for $10 million cash will expand PrimeVigilance’s geographical reach to North America and enhance the platform for broader clinical services in the region
  • Post year-end initiation of a study at the Papa Giovanni XXIII Hospital in Bergamo, Italy of siltuximab, an interleukin (IL)-6 targeted monoclonal antibody, for the treatment of patients with serious respiratory complications caused by COVID-19

New Credit Facility

     ·Post year-end, agreed a new three-year, multi-currency, £30 million credit facility with the Group’s bankers to facilitate the pursuit of the growth strategy

COVID-19 Update

      ·Ergomed is monitoring closely the rapid development of events in relation to the coronavirus outbreak. To date we have not seen a material impact on the business. Plans for financial risk mitigation are in place and will be implemented should this become necessary. The Group has a strong balance sheet and a £30m credit facility and is a resilient business in the face of the risks posed by COVID-19.

Notes:
[1] Adjusted EBITDA is defined as profit before tax for the year, adding back finance costs, depreciation and amortisation, share-based payments, acquisition-related contingent consideration, change in fair value of contingent consideration, acquisition costs and exceptional items. Adjusted EBITDA is management's key financial metric for measuring ongoing operational profitability.

Conference call for analysts:
A conference call for analysts will be held at 9.30am GMT on 25 March 2020

Conference call details:

Participant dial-in: 08003767922
International dial-in:
+44 (0) 2071 928000
Participant code:
7082317

Enquiries:

Ergomed plc  Tel: +44 (0) 1483 402 975
Miroslav Reljanović (Executive Chairman)  
Richard Barfield (Chief Financial Officer)  
   
Numis Securities Limited Tel: +44 (0) 20 7260 1000
Freddie Barnfield / Huw Jeremy (Nominated Adviser)  
James Black (Broker)  
   
Consilium Strategic Communications – for UK enquiries Tel: +44 (0) 20 3709 5700
Chris Gardner / Sue Stuart ergomed@consilium-comms.com
Matthew Neal / Olivia Manser  
   

About Ergomed plc

Ergomed provides specialist services to the pharmaceutical industry spanning all phases of clinical development, post-approval pharmacovigilance and medical information. Ergomed’s fast-growing, profitable services business includes an industry leading suite of specialist pharmacovigilance (PV) solutions, integrated under the PrimeVigilance brand, a full range of high-quality contract research and trial management services under the Ergomed brand (CRO), and an internationally recognised specialist expertise in orphan drug development, under PSR. For further information, visit: http://ergomedplc.com.

Forward-Looking Statements

Certain statements contained within the announcement are forward-looking statements and are based on current expectations, estimates and projections about the potential returns of Ergomed plc (“Ergomed”) and the industry and markets in which Ergomed operates, the Directors' beliefs and assumptions made by the Directors. Words such as "expects", "anticipates", "should", "intends", "plans", "believes", "seeks", "estimates", "projects", "pipeline" and variations of such words and similar expressions are intended to identify such forward-looking statements and expectations. These statements are not guarantees of future performance or the ability to identify and consummate investments and involve certain risks, uncertainties, outcomes of negotiations and due diligence and assumptions that are difficult to predict, qualify or quantify. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements or expectations. Among the factors that could cause actual results to differ materially are: the general economic climate, competition, interest rate levels, loss of key personnel, the result of legal and commercial due diligence, the availability of financing on acceptable terms and changes in the legal or regulatory environment.

These forward-looking statements speak only as of the date of this announcement. Ergomed expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Ergomed’s expectations with regard thereto, any new information or any change in events, conditions or circumstances on which any such statements are based, unless required to do so by law or any appropriate regulatory authority.


Chairman’s Statement

A TRANSFORMATIONAL YEAR

2019 has been a transformational year for Ergomed delivering strong revenue growth and financial results across both the pharmacovigilance (PV) and the contract research outsourcing (CRO) offerings and executing on our strategy to become a leading global provider of specialist services to the pharmaceutical industry. We also strengthened our Board and executive management team through the appointment of senior leaders with significant industry experience and proven track records in building international businesses.

Ergomed is now firmly established in a position of strength and stability which will support our ambitious long-term growth plans.

A Solid Base for Continued Growth
During the year, we have substantially strengthened the Ergomed business by completing our transition to a profitable and cash-generative service-based business model, with both divisions now demonstrating consistent growth and profitability, whilst terminating the previous co-development strategy and thereby eliminating ongoing R&D expense. We have also now closed out all deferred payments on prior acquisitions, enabling our strengthened management team to complete the integration of those prior acquisitions and to develop cost saving and cross-selling opportunities.

From this stable platform, our ambitious plans to rapidly build a global pharmaceutical services business are strongly underpinned by our substantial forward order book providing high visibility of future contracted profitable revenue growth. The potential for investment in the future of the business is supported by our existing cash balances, organic cash generation and substantial new banking facilities. Our 2019 results show our highest level of revenue growth is in North America. Together with the acquisition and rapid integration of Ashfield Pharmacovigilance Inc (“Ashfield PV”), we have rapidly built a platform for future growth in the largest pharmaceutical market globally for both clinical research and pharmacovigilance.

Attractive Long-Term Market Dynamics

The global CRO market is predicted to grow at 5% compound annual growth rate (CAGR) to $70 billion by 2027. Higher growth is expected in markets in the biotechnology and specialty pharma drug development sectors in which Ergomed specialises, including rare disease and orphan drug development growth of 11% CAGR and oncology growth of 9% CAGR. The North American and European markets are key to this growth, with over 70% of all global clinical trials started in 2018 requiring either US or European operations.

The global PV market is also expected to see continued growth of 11.6% CAGR to $8.9 billion by 2025. This growth reflects the increasing complexity of pharmacovigilance regulation globally and the trend among pharmaceutical and biotechnology companies towards greater outsourcing of PV workstreams to specialist providers such as Ergomed.

We believe that these macro trends and the continued consolidation of the larger global pharmaceutical service companies will create an opportunity for Ergomed and its shareholders over the long term, through the creation of a publicly-traded global specialist service provider meeting dynamic industry demands, with high growth potential.

Executing our Strategy
In 2018, Ergomed announced that it would focus its strategy on its core service businesses in the PV and CRO sectors. We envisaged that this focus would result in significant growth and improved financial performance through realising the potential of our specialist services and established brands.

2019 saw further execution of this strategy, resulting in a significantly improved financial and operational performance. During the year, we saw revenue growth of 26.1% to £68.3 million underpinned by strong performances in PV and CRO. This continues a trend which has seen a compound annual growth rate of 22% over the past 6 years.

We have refined and aligned commercial strategies in our CRO and PV businesses and invested in our business development teams, the benefits of which can be seen in our growing order book and the increase in cross-selling opportunities.

Having acquired and successfully integrated several businesses into the Group, Ergomed is now realising the benefits of these acquisitions, positioning the Group as a leader in rare disease and orphan drug development, oncology, biotechnology and specialty pharma drug development, key drivers of growth across the combined PV and CRO business.

The acquisition of Ashfield PV, a long-established and respected provider of pharmacovigilance services in the US, provides the opportunity for further growth and, in line with its stated strategy, the Board will continue to actively consider the acquisition of PV and CRO businesses that will complement and strengthen the existing service offering of the Ergomed and PrimeVigilance brands and give access to new customers and geographies.

Strengthening the Board

During the year, Ergomed announced a number of key appointments including additions to the executive team and Board. Richard Barfield, our Chief Financial Officer (‘CFO’), appointed in June 2019, brings with him a wealth of experience, including as the former CFO of Chiltern International. Post year-end, we welcomed Lewis Cameron to the Board as Chief Operating Officer (‘COO’) and expect to benefit from his considerable operational expertise from companies including Covance and Chiltern.

The Board was also pleased to welcome Dr. Jim Esinhart, former CEO of Chiltern, Rolf Soderstrom, former CFO of BTG plc and Ian Johnson, former Executive Chairman of Bioquell PLC, as Non-Executive Directors, joining Michael Spiteri, Global COO of Digital Data and Development at HSBC, who has been a Non-Executive Director since October 2018.

These appointments add to the growing pool of industry-leading talent Ergomed is attracting and reflect the professionalism of the current team and the growth potential of the business. We have now established a single leadership structure across all commercial and operational functions to maximise opportunities for synergies and cross-selling and delivery on strategy.

COVID-19
Events in relation to the COVID-19 virus outbreak are continuing to evolve rapidly. The Group is monitoring the situation closely as it develops.

Health and Safety
Ergomed’s priorities remain the health and safety of our employees and the maintenance of our service to all the patients and medical staff involved in our clinical studies and pharmacovigilance services.

We have increased vigilance on hygiene across all our sites and stopped all but absolutely necessary travel. After thorough systems stress testing and in reliance on our established business continuity plans, the Group has transitioned to home working and digital communications for the majority of our staff. We are fortunate that the nature of our work and the robustness of our technology systems make this possible with minimal disruption to our operations. We have additional protocols to take further contingency measures should the situation deteriorate further.

We are continuing to provide clinical study and pharmacovigilance monitoring services in support of all our patients and medical partners. In most cases these services are already or can be performed remotely and we have now been able to transition to full remote working. To date we have not seen any reduction in our service levels or productivity metrics, indicating that the quality and scale of the care we are providing to our patients and the healthcare profession continue at normal levels so far. 

Business Continuity
At this time, Ergomed has not seen a material impact on its business. As mentioned above, we have not so far seen any decline in our performance metrics. As the vast majority of Ergomed’s services in both clinical research and pharmacovigilance are provided under long-term contracts and in order to meet medical monitoring needs essential for medical research and to meet legally mandated pharmacovigilance requirements, we believe it is likely that this will continue to be the case for all existing contracted services. However, whilst the duration of the outbreak and the prospects for financing of new drug development remain unclear, it can be expected to cause disruption to business development activities as scientific conferences are cancelled and travel restrictions tighten.

Risk Mitigation
Ergomed will continue to monitor closely the rapidly evolving situation. Whilst no immediate risks to the Group’s revenues have been identified, plans for financial risk mitigation are in place and will be implemented should this become necessary. The Group has a strong balance sheet and a £30m credit facility and is a resilient business in the face of the risks posed by COVID-19.

Our Contribution to the Global Fight Against COVID-19
Ergomed will use all the resources at its disposal to contribute to the efforts of the global and scientific community to beat the COVID-19 virus. We will do this by continuing to provide our clinical trial and monitoring services for our existing and new clients and patients to the highest professional standards.

At the same time, we will provide our services to researchers and clinicians for new projects designed to combat the virus. As an example, we have recently announced the initiation of a study of siltuximab, an interleukin (IL)-6 targeted monoclonal antibody, for the treatment of patients with COVID-19 who have developed serious respiratory complications. The study is sponsored by the Papa Giovanni XXIII Hospital in Bergamo, Italy and supported by EUSA Pharma. This important study illustrates how Ergomed’s long experience and deep expertise in the provision of clinical study and pharmacovigilance services can play a part in assisting the global scientific community in its fight against COVID-19.  

Conclusion

The success which Ergomed achieved in 2019 is the product of the hard work and dedication of all our colleagues. We attracted many new professionals to our team during the year, which will create more opportunities, both in the UK and internationally, as we look to strengthen our operational base further. I would like to thank everyone at Ergomed for their contribution during the year, and our investors for their continued support.

Globally the COVID-19 situation is developing extremely rapidly. While we are confident in the resilience of the Group and in our strategy, there are significant uncertainties arising from the spread of the coronavirus and the policy choices made in each country, and the outlook and longer term financial impact of the pandemic remain uncertain. We will provide further updates as we have more clarity, including as part of our usual reporting cycle in July and September 2020.

Miroslav Reljanović

Executive Chairman

Operational Review

Introduction

2019 has seen a strong operational and financial performance across the Group. This reflects the continued execution of our strategy to deliver world-class pharmacovigilance and contract research outsourcing services to customers and the cultivation of business development and cross-selling opportunities between these two complementary businesses. The Group enters 2020 on a stable platform with a clear and proven growth strategy, a robust financial position and experienced leadership to realise the longer-term strategic priorities of the business.

Pharmacovigilance

Ergomed’s comprehensive range of services in both the PV and CRO sectors are complementary and allow it to support pharmaceutical and biotechnology companies through all phases of clinical development, post-approval pharmacovigilance and medical information services.

The PV market continues to see significant change through the introduction of strict drug testing and approval regulations and the need for the market to use big data analytics. PrimeVigilance is recognised as a global leader in providing pharmacovigilance, regulatory and medical information services, as highlighted by the receipt of The Queen’s Award for Enterprise in the International Trade category in 2019. The increased visibility of the brand and PrimeVigilance’s growth over the past year has been facilitated by our focus on a ‘quality first’ approach, ongoing investment in people, recruitment and training, and the development and deployment of the latest available technologies, including automation and robotic technology.

Fundamental to the “quality first” approach is Ergomed’s medic-led service. PrimeVigilance employs around 50 physicians, over 300 pharmacists and other life sciences professionals and over 20 in-house EU Qualified Persons for Pharmacovigilance (EU QPPV) and has a network of Local Qualified Persons covering over 60 countries. This constitutes one of the largest qualified teams of PV specialist professionals in any independent pharmaceutical services business globally. The breadth and depth of staff and professionals supporting PrimeVigilance has contributed to the growing number of customers serviced in the year increasing to more than 150 with a presence in over 100 countries and resulting in a top-line service revenue growth of 28.6% (2018: 21.9%).

This was complemented post year-end as a result of the acquisition of Ashfield PV by the addition of a further 40 customers and over 70 new PV specialist colleagues.

Technology is at the core of the PrimeVigilance quality first approach. Its technology offering has allowed pharmacovigilance services to be delivered with speed, consistency and accuracy within both customer and in-house databases. Ergomed will continue to invest in technology to further drive efficiency, quality and, as a result, competitiveness.

In addition, the PV strategy has been to grow the business and brand awareness organically and through the acquisition and successful integration of businesses which are complementary to the PrimeVigilance approach and offer routes into new markets, be it customer specialisms or geographies. In 2019, this focus has effectively delivered with revenue growth up 28.6% to £35.4 million (2018: £27.5 million) and gross margin growth up 44.8% to £18.2 million (2018: £12.6 million).

The PV business, with the significant growth over the last year and the post year-end acquisition of Ashfield PV, is well placed to continue the delivery of its growth strategy into 2020.


Contract Research Outsourcing

Ergomed delivers market-leading quality CRO services through a comprehensive offering of clinical trial research support covering all phases of medical development via a global network of research experts and patients.

The Group’s CRO brands, Ergomed and PSR Orphan Experts, are leading providers of full-service clinical research in the specialist areas of oncology and orphan drug development. Using their extensive experience in specialist fields and their global presence, both brands are able to focus on effective patient recruitment and reducing the time and cost of clinical trials across all phases of development.

The continued growth and success of the Group’s CRO business is a result of its focus on management and physician teams working closely together to ensure focus on a considered patient recruitment process, maximising patient retention and ensuring efficient programme management and control over complex trial protocols. In addition, the Group has continued to invest in its CRO service offering through its investment in the enhanced digitalisation of CRO services.

Orphan drug development focuses on rare diseases, which by definition are smaller drug trials, but which require specialist expertise. Through the PSR brand, Ergomed has distinguished itself from competitors in this market, and as a result, 45% of new CRO business in 2019 has been secured through orphan drug related customers.

Revenues for the CRO business have grown 23.6% from £26.6 million to £32.8 million resulting in an increase in gross margin to £11.3 million, up 50.8% from £7.5 million in 2018.

As is typical for a CRO business, 25.9% (£8.5million) of Ergomed’s CRO revenue is generated as reimbursement revenue or pass-through costs (2018: 28.5%, £7.7 million). This reimbursement revenue, which is generated from costs on clinical trials passed on to the customer at no mark-up, can cause fluctuations in both revenue and gross margin. However, the underlying service fee gross margin of the CRO business (gross margin less reimbursement revenue and costs) increased substantially during the year, from 38.0% in 2018 to 46.4% in 2019.

Acquisitions

The Group continued to integrate, deliver revenue and cost synergies and realise growth opportunities from the PharmInvent, Harefield, Pharmacovigilance Services and PSR Group acquisitions from prior years. These businesses have allowed Ergomed to strengthen its position as a leading global specialist, leveraging this position and the cross-selling opportunities it provides across the PV and CRO businesses.

Shortly after the year-end in January 2020, the Group acquired Ashfield PV, a long-established and respected provider of PV services in North America, from UDG Healthcare. The Ashfield PV name was immediately rebranded to PrimeVigilance USA Inc and, through its offices in the Research Triangle in Cary, North Carolina, expands PrimeVigilance’s geographic coverage in the strategically important US market and strengthens Ergomed’s global service offering.

Operations

Leadership changes and appointments

During the year Dr. Miroslav Reljanović was appointed as Executive Chairman following the resignation of former CEO, Stephen Stamp, in January 2019. Miroslav is the founder of Ergomed and was previously the Chief Executive Officer of the Group.

The Group was pleased to welcome Richard Barfield, who took over from Stuart Jackson as CFO in June 2019. Richard is a Fellow of the Institute of Chartered Accountants with previous experience of the international CRO market having formerly served as CFO at Chiltern International.

Post year-end Lewis Cameron was appointed as Chief Operating Officer (COO). Lewis brings considerable operational expertise from companies in the services industry, including Covance and Chiltern.

Roy Ovel was appointed as Chief Commercial Officer (CCO) in April 2019 and leads the business development team across both the PV and CRO businesses, with a remit to maximise opportunities arising from the commercial integration of the business. Roy has worked in the clinical services industry for over 35 years and has a strong track record for developing high performing sales and marketing teams, previously with TFS and more recently with Worldwide Clinical Trials.

Jonathan West was appointed as President of Ergomed’s pharmacovigilance business, PrimeVigilance, in September 2019. Jon brings a wealth of experience in the global pharmacovigilance sector, including senior roles with Parexel. He is a PV expert and was the first employee of PrimeVigilance when it was formed in 2008, and later its Commercial Director.

Co-development
                        
During the year, in line with our previously stated strategy to grow Ergomed as a pharmaceutical services business and reduce our commitment to co-development projects, no new co-development partnerships were signed. The Group continues to seek a licensing or financial partner (or partners) for the Haemostatix products, Peprostat and ReadyFlow, whilst seeking to minimse our ongoing R&D expense and protect our intellectual property interests. Any future ongoing costs relating to co-development programmes are expected to be minimal.

Outlook

The demand for both PV and CRO services is expected to remain strong over the long term and in our CRO business we are currently experiencing high levels of interest in COVID-19 clinical research. Ergomed remains focused on its strategy to become a market leader in pharmacovigilance and orphan drug trial services. These combined businesses are expected to continue to create organic and inorganic growth opportunities to strengthen the existing service offering and expand the Group’s geographical markets.

The Group’s strong financial position is expected to support the delivery of its strategy, based on its year-end cash balance, cash generative operations, substantial contracted order book and the recently agreed credit facility.

For and on the behalf of the Board of Directors.

Miroslav Reljanović
Executive Chairman

Financial Review

Introduction

2019 saw a number of upgrades to market expectations, and the full year results include a further small uplift compared to the latest market expectations, as well as the announcement of the Group’s new credit facilities, thereby underlining the two key financial achievements of 2019: profitable growth and financial stability,

The upturn in revenues and margins seen in the second half of 2018 continued into 2019 and the Group is in a strong financial position at the year-end with a strengthened balance sheet. We believe that the Group now has the platform and resilience required to maintain a steady course through 2020, recently bolstered by the acquisition of Ashfield PV in January 2020.

The Group and wider financial reporting community have experienced significant changes in the accounting regulatory landscape over the past two years, firstly with the introduction of the International Financial Reporting Standards IFRS 9 on financial instruments and IFRS 15 on revenue from contracts with customers, and more recently with the introduction of IFRS 16 on leases. These new accounting standards continue to increase the robustness and transparency of financial reporting.

The implementation of IFRS 16, Leases, for the 2019 results has introduced all the Group’s leases onto the balance sheet as a ‘right-of-use’ asset and lease liability and uplifted 2019 reported and adjusted EBITDA by £1.8m. Further detail on the adoption of IFRS 16 is set out in note 10.

KPIs and APMs

Key Performance Indicators (KPIs)

The table below summarises the KPIs that management uses to measure the financial performance of the Group. The 2019 results are set out ‘As reported’ under current applicable accounting standards including the adoption of IFRS 16 in the year, and ‘Under IAS 17’ as if they were presented under the prior year accounting standards and were consistent with those prepared in 2018.

  2019  
£ millions (unless otherwise stated) As reported Under
IAS 17
2018
Total Revenue 68.3 68.3 54.1
CRO 32.8 32.8 26.6
PV 35.4 35.4 27.5
Gross profit 29.5 29.5 19.3
Gross margin 43.3% 43.3% 35.6%
EBITDA 9.2 7.4 (7.9)
Adjusted EBITDA 12.5 10.7 2.3
Earnings per share (basic) 12.0p 12.2p (20.0)p
Cash generated from operations 11.6 10.1 0.9
Cash and cash equivalents 14.3 14.3 5.2
Order book 124.1 124.1 109.2

Alternative performance measures (APMs)

In measuring and reporting financial information, management reviews Alternative Performance Measures (APM’s), such as EBITDA and adjusted EBITDA, which are not defined measures under financial reporting standards. Management believes that these measures, when considered in conjunction with defined financial reporting measures, provide management and stakeholders with a better understanding of the performance of the business.

Operating profit/(loss) is the financial reporting measure under IFRS most comparable to EBITDA and adjusted EBITDA. Operating profit/(loss) is reconciled to EBITDA and adjusted EBITDA as follows:

  2019 2018
  £000s £000s
Operating profit/(loss) 5,518 (10,446)
Adjust for:    
Depreciation and amortisation charges within Other selling, general & administration expenses 3,041 1,248
Amortisation of acquired fair valued intangible assets 671 1,286
EBITDA 9,230 (7,912)
Share-based payments 870 758
Acquisition-related contingent compensation 87 972
Change in the fair value of contingent consideration for acquisitions (512) (233)
Acquisition costs 393 174
Exceptional items 2,427 8,494
Adjusted EBITDA 12,495 2,253

The Directors make certain adjustments to EBITDA to derive adjusted EBITDA, which they consider more reflective of the Group’s underlying trading performance and enables comparisons to be made with prior periods. Certain items, such as share-based payments, revaluation of deferred consideration for acquisitions and write-back of deferred consideration for acquisitions are non-cash items and reflect adjustments to expected future deferred consideration payments.

Deferred consideration for acquisitions expense relates to the cash component of deferred consideration which is payable contingent on the continued employment of the vendors. These costs, together with acquisition costs and exceptional items, are cash costs but are not considered as normal recurring trading items and therefore are not included in adjusted EBITDA.

Management also uses order book, or, in prior years, contracted order backlog, as an APM. Order book is the contracted value of customer revenue relating to in-progress performance obligations which are expected to be recognised in the future. The use of order book by management is no longer considered to be an APM as, from 1 January 2018, it is now a defined financial measure under IFRS 15.

Growth

The positive revenue performance seen in both Clinical Research Outsourcing and Pharmacovigilance during the first six months of the year continued through to the year-end and resulted in a strong order book at the start of 2020.

Revenues for 2019 totaled £68.3 million, an increase in of 26.1% over the prior year (2018: £54.1 million), with CRO revenues increasing 23.6% from £26.6 million to £32.8 million and PV revenues increasing 28.6% from £27.5 million to £35.4 million.

The growth in revenue was accompanied by a 53.3% increase in gross profit from £19.3 million in 2018 to £29.5 million in 2019 and an enhancement in gross profit margin from 35.6% in 2018 to 43.3% in 2019. The increase in revenue and gross margin percentage was enhanced by one-off change orders and project completions in the first half of the financial year which are not expected to recur in 2020.

The Group also progressed its strategy to close out its co-development activities to enable greater focus on the PV and CRO service model. As a result, the Group has reduced its overall R&D expenditure from £1.6 million in 2018 to £0.5 million in 2019 and, during 2019, realised impairment charges and write-offs totaling £2.4 million as exceptional costs (2018: £6.6 million). The Group will continue to minimise the ongoing costs to maintain the programmes while continuing to exercise prudent stewardship over the co-development assets.

The strong revenue growth and continued focus on profitability in 2019 have resulted in an adjusted EBITDA of £12.5 million, an increase of £10.2 million over the prior year (2018: £2.3 million). The adjusted EBITDA result for 2019 was augmented by the cost reduction programme implemented and completed in 2018.

Financial stability

The strong results for the year, specifically the growth in revenue and profitability, have significantly enhanced the Group’s cash generation at an operating level, with cash generated from operations of £11.7 million, an increase of £10.7 million over the prior year (2018: £1.0 million).

The Group continues to strengthen its balance sheet, with cash and cash equivalents increasing by £9.1 million to £14.3 million at the year-end (2018: £5.2 million). The cash headroom has been augmented after the year-end by the agreement of a £30 million credit facility with the Group’s bankers, HSBC UK Bank plc. The facility comprises a £15 million, three-year, multi-currency revolving credit facility and an accordion facility under which up to an additional £15 million can be borrowed on the same terms with the bank’s approval. The facility is secured by a debenture.  

Outlook

We move into 2020 having secured a combined order book at the end of 2019 of £124.1 million, up 13.6% on the prior year (2018: £109.2 million), being debt free and starting the year with significant cash headroom, including cash and cash equivalents of £14.3 million prior to the Ashfield PV acquisition in January 2020.

This stable financial platform facilitated the acquisition of Ashfield PV, which completed on 10 January 2020 for a total cash consideration of $10 million. Ashfield PV was rebranded as PrimeVigilance USA Inc immediately after purchase and is expected to drive the rapid expansion of the PV business in North America and to strengthen our global service offering. The purchase of the business at the start of 2020 will allow almost a whole financial year of enhanced revenue and EBITDA to complement the Group’s results in 2020.

Ergomed will continue to monitor closely the rapidly evolving coronavirus outbreak. Whilst no immediate risks to the Group’s revenues have been identified, plans for financial risk mitigation are in place and will be implemented should this become necessary. The Group has a strong balance sheet and a £30m credit facility and is a resilient business in the face of the risks posed by COVID-19.

Richard Barfield
Chief Financial Officer


Consolidated income statement and consolidated statement of comprehensive income
For the year ended 31 December 2019

    2019 2018
  Notes £000s £000s
Revenue 2,3 68,255 54,112
Cost of sales   (29,790) (26,788)
Reimbursable expenses   (8,940) (8,070)
Gross profit 3 29,525 19,254
Selling, general and administration expenses   (23,514) (28,152)
Selling, general and administration expenses comprises:      
Other selling, general and administration expenses   (19,578) (16,701)
Amortisation of acquired fair valued intangible assets   (671) (1,286)
Share-based payment charge   (870) (758)
Acquisition-related contingent compensation   (87) (972)
Change in the fair value of contingent consideration for acquisitions   512 233
Acquisition costs   (393) (174)
Exceptional items 4 (2,427) (8,494)
Research and development   (545) (1,578)
Net impairment losses on financial and contract assets   - (9)
Other operating income   51 39
Operating profit/(loss)   5,517 (10,446)
Finance income   28 23
(Loss)/gain on fair value of equity investments 7 (286) 277
Finance costs   (273) (622)
Profit/(loss) before taxation   4,986 (10,768)
Taxation 5 583 1,788
Profit/(loss) for the year   5,569 (8,980)
Profit/(loss) per share      
Basic 6 12.0p (20.0)p
Diluted 6 11.5p (20.0)p

All activities in the current and prior period relate to continuing operations.

  2019 2018
  £000s £000s
Profit/(loss) for the year 5,569 (8,980)
Items that may be classified subsequently to profit or loss:    
Exchange differences on translation of foreign operations (208) 120
Other comprehensive income for the year net of tax (208) 120
Total comprehensive profit/(loss) for the year 5,361 (8,860)

Profit or loss and each component of other comprehensive income are attributable to the owners of the Company.

The accompanying notes are an integral part of these consolidated financial statements.


Consolidated balance sheet
As at 31 December 2019

    2019 2018
  Notes £000s £000s
Non-current assets      
Goodwill   13,380 13,659
Other intangible assets   2,755 3,740
Property, plant and equipment   1,110 1,344
Right-of-use assets 10 5,171
Equity investments 7 2,065
Deferred tax asset   2,616 581
    25,032 21,389
Current assets      
Trade and other receivables   14,359 16,429
Accrued revenue 2 3,382 3,857
Cash and cash equivalents   14,259 5,189
    32,000 25,475
Total assets   57,032 46,864
Current liabilities      
Lease liabilities 10 (1,718) (6)
Trade and other payables   (10,373) (10,989)
Contingent and deferred consideration   (119)
Deferred revenue 2 (3,701) (5,651)
Current tax liability   (813) (422)
Total current liabilities   (15,861) (17,187)
Net current assets   16,139 8,288
Non-current liabilities      
Lease liabilities 10 (3,716)
Provisions   (341) (216)
Contingent and deferred consideration   (544)
Deferred tax liability   (294) (554)
    (4,351) (1,314)
Total liabilities   (20,212) (18,501)
Net assets   36,820 28,363
Equity      
Share capital 8 473 452
Share premium account   25,790 24,384
Merger reserve   11,088 11,088
Share-based payment reserve   4,300 3,430
Translation reserve   674 882
Retained earnings   (5,505) (11,873)
Total equity   36,820 28,363

The accompanying notes are an integral part of these consolidated financial statements.


Consolidated statement of changes in equity
For the year ended 31 December 2019

          Share-      
      Share   based      
    Share premium Merger payment Translation Retained  
    capital account reserve reserve reserve earnings Total
  Notes £000s £000s £000s £000s £000s £000s £000s
Balance at 1 January 2018   428 20,616 11,008 2,674 762 (2,877) 32,611
Loss for the year   (8,980) (8,980)
Other comprehensive income for the year   120 120
Total comprehensive income for the year   120 (8,980) (8,860)
Transactions with shareholders in their capacity as shareholders:                
Share issue during the year for cash (net of expenses) 8 21 3,768 3,789
Share issues during the year for non-cash consideration 8 1 80 81
Contingent share issue for non-cash consideration 8 2 (2)
Share-based payment charge for the year   758 758
Deferred tax (debit) taken directly to equity   (16) (16)
Total transactions with shareholders in their capacity as shareholders   24 3,768 80 756 (16) 4,612
Balance at 31 December 2018   452 24,384 11,088 3,430 882 (11,873) 28,363
Profit for the year   5,569 5,569
Other comprehensive income for the year   (208) (208)
Total comprehensive income for the year   452 24,384 11,088 3,430 674 (6,304) 33,724
Transactions with shareholders in their capacity as shareholders:                
Share issue during the year for cash 8 21 1,406 1,427
Share-based payment charge for the year   870 870
Deferred tax credit taken directly to equity   799 799
Total transactions with shareholders in their capacity as shareholders   21 1,406 870 799 799
Balance at 31 December 2019   473 25,790 11,088 4,300 674 (5,505) 36,820

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated cash flow statement
For the year ended 31 December 2019

    2019 2018
  Notes £000s £000s
Cash flows from operating activities      
Profit/(loss) before taxation   4,986 (10,768)
Adjustment for:      
Amortisation and depreciation   3,712 2,534
Impairment of goodwill, intangibles, equity investments and other assets   2,427 18,222
Loss on disposal of fixed assets   25 33
Share-based payment charge   870 758
Change in the fair value of equity investments 7 286 (277)
Change in the fair value of contingent consideration for acquisition   (512) (11,617)
Finance income   (28) (300)
Finance costs   273 622
Operating cash inflow/(outflow) before changes in working capital and provisions   12,039 (793)
Decrease/(increase) in trade, other receivables and accrued revenue   1,878 (505)
(Decrease)/increase in trade, other payables and deferred revenue   (2,380) 3,034
Increase in provisions   126 216
Cash generated from operations   11,663 1,952
Taxation received   124 146
Net cash inflow from operating activities   11,787 2,098
Investing activities      
Finance income received   7 5
Acquisition of intangible assets   (604) (753)
Acquisition of property, plant and equipment   (392) (834)
Receipts from sale of property, plant and equipment   8 7
Equity investments received in exchange for services provided 7 (1,904) (1,054)
Disposal of equity investments 7 1,099
Acquisition of subsidiaries, net of cash acquired   (115) (410)
Acquisition related earn-out paid   (930) (751)
Net cash outflow from investing activities   (2,831) (3,790)
Financing activities      
Issue of new shares 8 1,427 3,973
Expenses of fundraising   (183)
Finance costs paid   (4)
Payment of lease liabilities   (1,677) (12)
Net cash (outflow)/inflow from financing activities   (250) 3,774
Net change in cash and cash equivalents   8,706 2,082
Effect of foreign currency on cash balances   364 (111)
Cash and cash equivalents at start of the year   5,189 3,218
Cash and cash equivalents at end of year   14,259 5,189

The accompanying notes are an integral part of these consolidated financial statements.


Notes to the financial statements
For the year ended 31 December 2019

1. Basis of preparation

The consolidated financial statements of the Group are prepared on a going concern basis, in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, the IFRS Interpretations Committee (IFRS-IC) interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a historical cost basis except that the following assets and liabilities are stated at their fair value: certain financial assets and financial liabilities measured at fair value, and liabilities for cash-settled share-based payments.

The financial information contained in this final announcement does not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006. The financial information has been extracted from the financial statements for the year ended 31 December 2019 which have been approved by the Board of Directors, and the comparative figures for the year ended 31 December 2018 are based on the financial statements for that year.

The financial statements for 2018 have been delivered to the Registrar of Companies and the 2019 financial statements will be delivered after the Annual General Meeting on 10 June 2020.

The Auditor has reported on both sets of accounts without qualification, did not draw attention to any matters by way of emphasis without qualifying their report, and did not issue a statement under Section 498(2) or 498(3) of the Companies Act 2006.

The Directors confirm that, to the best of their knowledge, this condensed set of consolidated financial statements has been prepared in accordance with the AIM Rules.

Except as described below, the accounting policies adopted are consistent with those of the financial statements for the year ended 31 December 2018, as described in those financial statements.

Accounting standards adopted in the period – IFRS 16, Leases

On 1 January 2019 the Group adopted International Financial Reporting Standard 16 ("IFRS 16") – Leases – using the modified retrospective approach. The impact of the adoption and accounting policy for IFRS 16 is set out in note 10

Going Concern

After reviewing the Group's forecast income and expenditure, performing appropriate sensitivity and scenario analyses, and making appropriate enquiries, the Directors have a reasonable expectation that the Group and Company have adequate resources to progress their established strategy. Accordingly, they continue to adopt the going concern basis in preparing these financial statements.


2. Revenue

The Group’s revenue is disaggregated by geographical market and major service lines:

Geographical market and major service lines

2019

  Major service lines
  CRO PV Total
  £000s £000s £000s
Geographical market      
UK 5,096 7,590 12,686
Rest of Europe, Middle East and Africa 17,427 10,910 28,337
North America 9,245 16,337 25,582
Asia 1,064 445 1,509
Australia 10 131 141
  32,842 35,413 68,255

2018

  Major service lines
  CRO PV Total
  £000s £000s £000s
Geographical market      
UK 5,715 6,854 12,569
Rest of Europe, Middle East and Africa 16,913 9,604 26,517
North America 3,715 10,735 14,450
Asia 237 244 481
Australia 95 95
  26,580 27,532 54,112

The receivables, contract assets and liabilities in relation to contracts with customers are as follows:

    2019 2018
    £000s £000s
Contract assets      
Trade receivables   11,235 11,735
Accrued revenue   3,382 3,857
    14,617 15,592
       
Contract liabilities      
Deferred revenue   (2,957) (5,651)
Customer advances   (537) (734)
    (3,494) (6,385)

Accrued revenue primarily relates to consideration for work completed but not billed at the reporting date. The contract assets are transferred to trade receivables when the rights become unconditional.

Deferred revenue primarily relates to the advance consideration received from customers. There are no significant financing components associated with deferred revenue.

Customer advances relate to deposits made by customers as security over future services and third-party costs incurred in relation to those services.

3. Operating segments

Products and services from which reportable segments derive their revenues

Information reported to the Company’s Board, which is the chief operating decision maker (‘CODM’), for the purpose of resource allocation and assessment of segment performance is focused on the Group operating as two business segments, being Clinical Research Outsourcing and Pharmacovigilance. All revenues arise from direct sales to customers. The segment information reported below all relates to continuing operations. The PV segment includes the revenues of Harefield Pharmacovigilance Ltd and Pharmacovigilance Services Ltd following their acquisition by the Group in 2018.
The accounting policies of the reportable segments are the same as the Group’s accounting policies, with the exception that the information reported to the CODM in the prior year was prior to the effect of adjustments to revenue in relation to IFRS 15. Segment profit represents the gross profit earned by each segment. Other amounts, including selling, general and administration expenses were not allocated to a segment. This was the measure reported to the CODM for the purpose of resource allocation and assessment of segment performance.

2019       Consolidated
    CRO PV total
    £000s £000s £000s
Net service revenue   24,343 34,946 59,289
Reimbursement revenue   8,499 467 8,966
Segment revenues   32,842 35,413 68,255
Cost of sales   (13,045) (16,745) (29,790)
Reimbursable expenses   (8,498) (442) (8,940)
Segment gross profit   11,299 18,226 29,525
Selling, general and administration expenses       (23,514)
Selling, general and administration expenses comprises:        
Other selling, general and administration expenses       (19,578)
Amortisation of acquired fair-valued intangible assets       (671)
Share-based payment charge       (870)
Acquisition-related contingent compensation       (87)
Change in the fair value of contingent consideration for acquisitions       512
Acquisition costs       (393)
Exceptional items       (2,427)
Research and development       (545)
Net impairment of financial and contract assets      
Other operating income       51
Operating profit       5,517
Finance income       28
Unrealised loss on equity investments       (286)
Finance costs       (273)
Profit before tax       4,986

2018

      IFRS 15 Consolidated
  CRO PV adjustments total
  £000s £000s £000s £000s
Net service revenue 19,713 27,138 7,261 54,112
Reimbursement revenue 7,697 394 (8,091)
Segment revenues 27,410 27,532 (830) 54,112
Cost of sales (12,172) (14,616) (26,788)
Reimbursable expenses (7,744) (326) (8,070)
Segment gross profit 7,494 12,590 (830) 19,254
Selling, general and administration expenses       (28,152)
Selling, general and administration expenses comprises:        
Other selling, general and administration expenses       (16,701)
Amortisation of acquired fair-valued intangible assets       (1,286)
Share-based payment charge       (758)
Acquisition-related contingent compensation       (972)
Change in the fair value of contingent consideration for acquisitions       233
Acquisition costs       (174)
Exceptional items       (8,494)
Research and development       (1,578)
Net impairment of financial and contract assets       (9)
Other operating income       39
Operating loss       (10,446)
Finance income       23
Unrealised gain on equity investments       277
Finance costs       (622)
Loss before tax       (10,768)



4. Exceptional items

In line with the way the Board and chief operating decision maker review the business, large one-off exceptional costs are shown as exceptional items.

  2019 2018
  £000s £000s
Impairment of equity investment 2,427 45
Establishment of pharmacoepidemiology business 356
Cost reduction programme 760
Business reorganisation 557
Impairment of Haemostatix goodwill 2,143
Impairment of Haemostatix in process research and development 15,200
Impairment of Haemostatix other assets 834
Revaluation of Haemostatix contingent consideration (11,617)
Onerous contract provision 216
  2,427 8,494

During the year ended 31 December 2019, the fair value equity investment in Modus Therapeutics Holding AB was impaired to £nil resulting in a charge to exceptional items of £2,427,000 (see note 7).

In the prior year, exceptional items related to the establishment of the pharmacoepidemiology business, reorganisation expenses associated with the combining of the PrimeVigilance and PharmInvent businesses, the cost reduction programme to increase operating efficiency and improve overall profitability, the impairment of the Haemostatix business and the change in fair value of the Haemostatix contingent consideration and onerous contract costs relating to Haemostatix.

5. Taxation

  2019 2018
  £000s £000s
Current tax    
UK corporation tax charge/(credit) for the year 174 (92)
Overseas corporation tax 832 503
Adjustment in respect of prior years (58) (383)
Current tax charge for the year 948 28
Deferred tax    
Origination and reversal of temporary differences (1,531) (2,718)
Derecognition of deferred tax asset 902
Total deferred tax credit (1,531) (1,816)
Total tax (credit) for the year (583) (1,788)

6. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:

  2019 2018
  £000s £000s
Profit/(loss) for the purposes of basic and diluted earnings per share – net profit attributable to owners of the Company 5,569 (8,980)


  2019 2018
Number of shares    
Weighted average number of Ordinary Shares for the purposes of basic earnings per share 46,599,917 44,693,699
Incremental shares in respect of employee share schemes 2,027,154
Shares to be issued in settlement of contingent consideration 158,810
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share 48,627,071 44,852,509
Loss per share    
Basic 12.0p (20.0)p
Diluted 11.5p (20.0)p

For the purposes of determining the denominator for basic earnings per share, contingent shares are included from the beginning of the period in which the contingency is met. In the prior year, the contingency relating to the issue of shares in respect of consideration for PharmInvent was met and therefore they have been included within the denominator for basic earnings per share as at 31 December 2018.


7. Equity investments

                 
  Carrying amount at
1 January
2019
Equity received in
exchange for services
provided
Change in fair value recognised
in the income
statement
Impairment of
investments
Disposals Translation
movement
Carrying amount at
31 December
2019
 
 
  £000s £000s £000s £000s £000s £000s £000s
Asarina Pharma AB 863 567 (286) (1,099) (45)
Modus Therapeutics Holdings AB 1,202 1,337 (2,427) (112)
  2,065 1,904 (286) (2,427) (1,099) (157)

Asarina Pharma AB (‘Asarina’)
In 2018, Asarina completed a public offering and listing on the Nasdaq First North Exchange and the investment in equity was publicly traded. Under the co-development agreement with Asarina, the Group receives shares in Asarina in return for services provided to them under the co-development programme. During the year ended 31 December 2019, shares valued at £567,000 (2018: £297,000) were issued to the Group in exchange for services provided and shares valued at £1,099,000 were sold (2018: £nil).

Modus Therapeutics Holding AB (‘Modus’)
Under the co-development agreement with Modus, the Group receives shares in Modus in return for its contribution to the co-development programme. During the year ended 31 December 2019 shares valued at £1,337,000 (2018: £757,000) were issued to the Group in exchange for services provided by the Group.

Modus announced the initial results from its Phase II trial on 13 May 2019. Data from the study failed to show a meaningful benefit in the total study population. Given the results of the trial and the company’s funding position, management have impaired the value of the investment to £nil as at the year end.  

8. Ordinary share capital

  2019   2018
  Number £000s   Number £000s
Ordinary shares of £0.01 each          
Balance at 1 January 45,175,248 452   42,781,976 428
Issued through an institutional placing for cash   2,029,971 21
Exercise of share options 2,111,041 21   102,000 1
Issued for non-cash consideration   261,301 2
  47,286,289 473   45,175,248 452

In February 2018, the Company completed an institutional placing of 2,029,971 ordinary shares of £0.01 each (‘Ordinary Shares’) for 190p per share raising £3,674,000 net of expenses of £183,000. The nominal value of the shares was £21,000.

Options over 2,111,041 (2018: 102,000) Ordinary Shares were exercised for proceeds of £1,427,000 (2018: £117,000).

In the prior year, 53,101 Ordinary Shares were issued as part consideration for the acquisition of Pharmacovigilance Services, 49,390 Ordinary Shares were issued to Dr Michael Forstner in relation to the transfer of his pharmacoepidemiology business and 158,810 Ordinary Shares will be issued to part satisfy the third and final component of contingent consideration for PharmInvent.

9. Post year-end acquisition of subsidiary – PrimeVigilance USA Inc

On 13 January 2020, the Group acquired all of the issued share capital in Ashfield Pharmacovigilance Inc for $10 million, satisfied in cash. Immediately after acquisition the subsidiary changed its name to PrimeVigilance USA Inc. The company is a specialist pharmacovigilance provider based in the US. The business was purchased to expand the geographical coverage of PrimeVigilance, the Pharmacovigilance brand of the Ergomed group, and further develop the Group’s broader combined CRO and PV business globally. The subsidiary acquisition was post year-end and has not contributed to the consolidated profit of the group for the year ended 31 December 2019.

  Book Fair value Final
  values adjustments valuation
  £000s £000s £000s
Intangible assets 159 2,392 2,551
Property, plant and equipment 779 779
Right-of-use assets 987 987
Total non-current assets 1,925 2,392 4,317
Trade and other receivables 1,450 (75) 1,375
Cash and equivalents 727 727
Current assets 2,177 (75) 2,102
Trade and other payables (320) (320)
Lease liability (1,075) (1,075)
Tax payable
Deferred tax liability (1,945) (1,945)
Financial liabilities (3,340) (3,340)
Total identifiable net assets 762 2,317 3,079
Goodwill 7,714 (2,410) 5,304
Total consideration 8,476 (93) 8,383
Satisfied by:      
Cash 7,706 (93) 7,613
Cash – working capital advance 770 770
Total consideration 8,476 8,383
Net cash outflow arising on acquisition      
Cash consideration 8,476 8,476
Less: cash and cash equivalent balances acquired (727) (727)
Less: working capital adjustment (93) (93)
Transaction expenses 393 393
  8,142 (93) 8,049

The fair value of intangible assets relates to customer relationships of £1,998,000 and contracted orderbook of £553,000. The group incurred acquisition related cost of £393,000 related to due diligence and legal activities in the year ended 31 December 2019. These costs have been included in acquisition costs within selling and administrative expenses in the group’s consolidated income statement.

The fair value of acquired receivables was £1,239,000. The gross contractual amounts receivable are £1,314,000 and, at the acquisition date, £75,000 of contractual cash flows were not expected to be received.

Ergomed plc has a 12-month measurement period from the date of acquisition, and therefore the measurement period will end on 10 January 2021.

10. Changes in accounting policies

IFRS 16 – Leases

On 1 January 2019, the Group adopted International Financial Reporting Standard 16, Leases (IFRS 16) using the modified retrospective approach. Under this approach the comparative financial information for the year ended 31 December 2018 has not been restated for the effect of this guidance and is prepared in accordance with the previous accounting guidance under IAS17. The cumulative effect of initial application is recognised in retained earnings at 1 January 2019.

Policy applicable from 1 January 2019 (IFRS 16)

At inception of a contract, the Group assess whether the arrangement is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For lease contracts, the Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of a lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and any costs to restore the underlying asset, less any incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of future lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot readily be determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in the future lease payments. When the lease liability is remeasured, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in the profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group presents the right-of-use assets and the lease liability separately on the balance sheet.

The policy has been applied to contracts entered into or changed on or after 1 January 2019.

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of equipment that have a term of less than 12 months or less and leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

Policy applicable before 1 January 2019 (IAS 17)

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Assets obtained under hire purchase contracts and finance leases are capitalised as tangible assets and depreciated over their useful lives. Obligations under such agreements are included in creditors net of the finance charge allocated to future periods. The finance element of the rental payment is charged to the income statement so as to produce a constant periodic rate of charge on the net obligation outstanding in each period.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the Income Statement on a straight-line basis over the period of the lease. Benefits received and receivable as an incentive to sign an operating lease are amortised over the full lease term.

Transition

On transition to IFRS 16 the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 were not reassessed.

The Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under IFRS 16 the Group recognises right-of-use assets and lease liabilities for most leases.

The Group opted to apply recognition exemptions to short-term leases where applicable.

At transition lease liabilities were measured at the present value of the remaining lease payments discounted using the Group’s incremental borrowing rate as at 1 January 2019. Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating under IAS 17:

  • Applied a single discount rate to a portfolio of leases with similar characteristics;
  • Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term;
  • Excluded initial direct costs from measuring the right-of-use asset at the date of initial application; and
  • Used hindsight when determining whether the lease term of the contract contains options to extend or terminate the lease.

For leases that were classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and the lease liability at 1 January 2019 are determined at the carrying amount of the lease assets and liabilities under IAS 17 immediately before that date.

Right-of-use assets

     
  Group Company
  £000s £000s
Cost    
31 December 2018
Impact of change in accounting policy – IFRS 16 6,625 140
1 January 2019 6,625 140
Additions 413
Translation movement (237) (4)
At 31 December 2019 6,802 136
Depreciation    
1 January 2019
Charge for the year 1,664 22
Translation movement (33)
At 31 December 2019 1,631 22
Net book value    
At 31 December 2019 5,171 113
At 1 January 2019 6,625 140

Lease liabilities

     
2019 Group Company
  £000s £000s
Maturity analysis – contractual undiscounted cash flows    
     
Less than one year 1,856 95
One to five years 3,846 24
Total undiscounted lease liabilities at 31 December 5,702 119
Lease liabilities included in the balance sheet at 31 December 5,419 117
     
Current 1,718 93
Non-current 3,701 24

Impact on financial statements

On transition to IFRS 16 the Group recognised £6,625,000 as a right-of-use asset and £6,625,000 as a lease liability.

When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The weighted-average rate applied was 4.3%.

By adopting IFRS 16 using the modified retrospective approach, the results reported for the year ended 2019 are not directly comparable to the prior year. As a result, management have prepared the following tables which compare the impact of adopting IFRS 16 on the key financial statement line items within the consolidated income statement and balance sheet for the 2019 year.

Consolidated income statement

  As reported under   Under
  IFRS 16 Adjustments IAS 17
  £000s £000s £000s
       
Revenue 68,255 68,255
Gross profit 29,525 29,525
Rental charges for right-of-use assets (1,800) (1,800)
EBITDA 9,229 (1,800) 7,429
EBITDA (adjusted)1 12,494 (1,800) 10,694
Amortisation of right-of-use assets (1,664) 1,664
Operating profit 5,517 (136) 5,381
Finance costs (273) 259 (14)
Profit before taxation 4,986 123 5,109
Taxation 583 (9) 574
Profit for the year 5,569 114 5,683
Earnings per share – basic 12.0p   12.2p
Earnings per share – diluted 11.5p   11.7p

Consolidated balance sheet

  As at 1 January 2019   As at 31 December 2019  
  As reported under   Under   As reported under   Under
  IFRS 16 Adjustments IAS 17   IFRS 16 Adjustments IAS 17
  £000s £000s £000s   £000s £000s £000s
               
Non-current assets 28,015 (6,625) 21,389   25,032 (5,171) 19,861
Current liabilities (18,594) 1,407 (17,187)   (15,861) 1,576 (14,285)
Non-current liabilities (6,532) 5,218 (1,314)   (4,351) 3,701 (650)
Net assets 28,363 28,363   36,820 106 36,926





1 EBITDA (adjusted) is defined as profit before tax for the year, adding back finance costs, depreciation and amortisation, share-based payments, acquisition related contingent consideration, change in fair value of contingent consideration, acquisition costs and exceptional items (note 4).


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