Financial Statements And Related Announcement - Half Yearly Results
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Review Of Performance
COMPARING 6 MONTHS ENDED 30 JUNE 2020 ("HY2020") AGAINST 6 MONTHS ENDED 30 JUNE 2019 ("HY2019")
Revenue decreased by 12.7% or S$3.8 million from S$30.1 million in HY2019 to S$26.2 million in HY2020.
Although the Group's services had been considered essential and the core operations, with proper hygiene protocols in place, could continue, COVID-19 had affected the demand for the Group's banking services. Consumers were tighter with their spending, and in some of the regions that the Group operates, movement limitations and border restrictions has made service delivery even more challenging. This resulted in an 18.5% decrease in the new samples processed and stored from 13,000 in HY2019 to 10,600 in HY2020. The decline in new samples stored was mitigated by the conversion of more clients to higher value price plans mainly in Singapore and the Philippines.
The Group also ramped up its diagnostic service offerings, which grew 77% or S$0.5 million from HY2019 to HY2020. The increase is in particular from the increase in pre-natal testing services offered by the Group.
Cost of sales
Cost of sales decreased by 12.3% or S$1.4 million in HY2020 compared to HY2019, which was in line with the decrease in new samples processed and stored. The decrease was partially offset a higher uptake of diagnostic services which led to an increase in the cost of sales.
Gross profit and gross profit margin
Gross profit decreased from S$18.9 million in HY2019 to S$16.5 million in HY2020 mainly due to a decrease in new samples processed and stored. While there was an increase in diagnostic services which generally has a lower gross profit margin, the impact was offset by a higher proportion of clients opting for higher value plans in Singapore and the Philippines. As a result, gross profit margin remained relatively stable at 62.7% and 62.9% in HY2020 and HY2019 respectively.
Other operating income
The decrease in other operating income for HY2020 compared to HY2019 of approximately S$75,000 was mainly due a decrease in fair value on the short-term investments of S$147,000 from a gain of S$106,000 in HY2019 to a loss of S$41,000 in HY2020 arising from short-term investments held in Malaysia. In addition, the Group had received a grant income in HY2019 from Spring Singapore for its participation in a joint Executive Development Scholarship program with Spring Singapore. No such grant income was recognised in HY2020.
The decrease was slightly offset by government grants received in Hong Kong and Malaysia of approximately S$120,000 for COVID-19. There was no such grant income in HY2019.
Selling and marketing expenses
Selling and marketing expenses decreased by 13.0% or S$1.4 million in HY2020 compared to HY2019. Advertising and promotion expenses decreased by approximately S$903,000 mainly due to restrictions imposed in various countries on physical trade fairs and antenatal seminars to minimise physical interactions in view of the spread of COVID-19. Nonetheless, the Group focused on online channels to continue to outreach and increase awareness of stemcell banking.
The decrease was also partly due to lower travel expenses of approximately S$275,000 as a result of travel restrictions and the implementation of a Group-wide policy to reduce business travel to safeguard the well-being employees during the pandemic. The decrease in selling and marketing expenses was also due to lower commission expenses of approximately S$114,000 as a result of a decline in new client acquisitions.
Administrative expenses decreased by 10.0% or S$1.1 million in HY2020 compared to HY2019.
The decrease was mainly attributed to the decrease in staff-related expenses and share grant expense amounting to approximately S$712,000 and S$87,000 respectively in HY2020 compared to HY2019. In view of the impact of the pandemic on the Group results as well as safe-distancing measures, the Group has reduced employee activities and placed restrictions on the replacement of headcount lost through natural attrition. Due to the decline in revenues and overall performance of HY2020 compared to HY2019, the variable component of employee compensation had been correspondingly reduced.
With the imposition of tighter travel restrictions and to safeguard the well-being of employees, corporate travel expenses for management and oversight have reduced by approximately S$179,000 from HY2019 to HY2020. With the shift to telecommuting and digital communications, other administrative expenses such as printing and stationery, office consumables, postage and courier fee, maintenance and cleaning services decreased by S$242,000. Legal, professional and consultancy fees decreased by S$238,000 as the Group focused on the current business operations and took a prudent approach towards potential business opportunities.
The decrease in expenses was offset by an increase in impairment loss on trade receivables and bad debts written off of approximately S$197,000 in HY2020 compared to HY2019 mainly due to additional allowance for doubtful debts recognised in Indonesia. The Group also recognised impairment loss on non-trade receivables due from a third party in its Indian subsidiary in HY2020 of S$255,000. No such impairment loss was made in HY2019.
Finance income comprises finance income on contract assets of S$4.3 million (HY2019: S$4.1 million) and interest income from deposits, short-term investments and note receivable of S$1.1 million (HY2019: S$844,000). Finance income from deposits, short-term investments and note receivable increased by S$270,000 mainly due to the increase in interest income from fixed deposits in India and Malaysia.
Finance costs relate to interest-bearing borrowings and lease liabilities which amounted to S$162,000 (HY2019: S$70,000). Finance costs increased by S$92,000 from HY2019 to HY2020 due to the recognition of finance cost on lease liabilities of approximately S$86,000. There was no such finance cost recognised in HY2019 as the Group adjusted for the impact of SFRS(I) 16 in December 2019.
Profit before income tax
As a result of the foregoing, the profit before income tax of S$3.1 million for HY2020 was 11.1% higher than for HY2019.
Over-provision of tax in respect of prior years of S$207,000 for HY2020 comprise an over-provision of corporate income tax of S$129,000 and S$78,000 for the Singapore and Malaysia subsidiaries respectively. In HY2019, the Group recognised an under-provision of tax in respect of prior years for its Indonesia operations.
Adjusting for the foregoing, the effective tax rate of 22.7% in HY2020 was lower than HY2019 at 31.3%. The decrease in effective tax rate was mainly due to the utilisation of tax losses carried forward from previous years for which no deferred tax asset was recognised.
Cash and cash equivalents, unpledged and pledged fixed deposits ("fixed deposits") and short-term investments
As at 30 June 2020, the Group maintained a strong balance sheet, with cash and cash equivalents, fixed deposits and short-term investments of S$65.3 million (31 December 2019: S$54.0 million). Short-term investments mainly comprise investments in money market funds. The increase in the total cash and cash equivalents, fixed deposits and short-term investments was mainly due to net cash generated from operating activities of S$6.7 million and proceeds from the sale of long-term investments of approximately S$5.1 million, offset by purchase of property plant and equipment and intangible assets of S$0.5 million under cash flow from investing activities as well as repayment of interest-bearing borrowings of S$153,000 under cash flows used in financing activities.
Net cash generated from operating activities comprised mainly operating cash flows before movements in working capital of S$358,000, net interest received of S$5.5 million, net working capital inflow of S$1.3 million offset by income tax paid of S$0.5 million.
Net working capital inflow of approximately S$1.3 million comprised the following:
- increase in trade receivables of approximately S$2.0 million;
- decrease in contract assets of approximately S$0.7 million;
- increase in other receivables, deposits and prepayments of approximately S$372,000;
- increase in inventories of approximately S$412,000;
- increase in trade and other payables of approximately S$564,000;
- decrease in lease liabilities of approximately S$520,000; and
- increase in contract liabilities of approximately S$3.3 million.
Property, plant and equipment
As at 30 June 2020, the Group recorded S$17.4 million on its balance sheet for property, plant and equipment (31 December 2019: S$16.1 million). The increase was mainly due to recognition of right-of-use assets of approximately S$2.3 million and S$300,000 in HY2020 upon renewal of leases of properties and equipment in Hong Kong and Singapore respectively. The increase was partially offset by depreciation of S$1.4 million in HY2020.
As at 30 June 2020 and 31 December 2019, the Group recorded S$7.7 million on its balance sheet for investment properties.
Intangible assets comprise client contracts, brand and goodwill acquired in business combinations and computer software.
Deferred tax assets
As at 30 June 2020, the Group recorded deferred tax assets of S$103,000 compared to S$100,000 as at 31 December 2019.
As of 31 December 2019, the long-term investments comprise the S$5.1 million investment in unquoted ordinary shares of CellResearch Corporation Pte. Ltd. ("CRC") which is carried at fair value through profit or loss and S$4.3 million of convertible note carried at fair value through profit or loss and its corresponding interest receivable.
On 1 February 2016, the Group subscribed for a Class A Redeemable Convertible Note ("RCN") maturing three years from the issue date in the principal amount of S$4.2 million from CRC. The yielding interest is at a rate of three month SIBOR plus 7% per annum payable annually in arrears. In June 2019, the Group signed a supplemental agreement to extend the RCN for another 2 years to 30 June 2021 on the same terms. As of 30 June 2020, the RCN and its corresponding interest receivable were being reclassified to other receivables, current.
On 14 February 2020, the Group exercised its right to sell the 4.2 million unquoted shares of CRC at approximately S$5,145,000 to the founders of CRC.
With the aforesaid reclassification of RCN and sale of the unquoted shares, there is no long-term investment as of 30 June 2020.
Contract assets, non-current
Non-current contract assets represent all service revenues arising from the performance obligations identified under instalment payment plans in the cord blood, cord lining and cord tissue banking contracts that have yet to be billed to clients. Upon billing, the billed amount will be receivable under the same terms as the current trade receivables. As at 30 June 2020, the Group recorded non-current contract assets of S$69.3 million (31 December 2019: S$69.7 million).
As at 30 June 2020, the Group recorded inventories of S$1.8 million (31 December 2019: $1.3 million).
As at 30 June 2020, the Group recorded prepayment of S$1.7 million (31 December 2019: S$2.1 million).
Trade receivables, current
Current trade receivables as at 30 June 2020 was S$25.7 million compared to S$24.0 million as at 31 December 2019.
Other receivables, current
As at 30 June 2020, the Group recorded other receivables of S$8.5 million compared to S$3.8 million as at 31 December 2019. The RCN and its interest receivable amounting to S$4.3 million had been reclassified to other receivables, current, as at 30 June 2020.
As at 30 June 2020, the Group recorded tax recoverable of S$2.2 million (31 December 2019: S$2.3 million).
Trade and other payables, current and non-current
As at 30 June 2020, the Group recorded current trade and other payables of S$16.3 million (31 December 2019: $15.9 million) and non-current other payables of S$394,000 (31 December 2019: S$429,000).
Interest-bearing borrowings, current and non-current
Interest-bearing borrowings decreased by approximately S$153,000, from S$4.3 million as at 31 December 2019 to S$4.1 million as at 30 June 2020, due to repayments made during the financial period.
Lease liabilities, current and non-current
As of 30 June 2020, the Group recognised lease liabilities of S$4.4 million on property and equipment leases (31 December 2019: S$2.5 million). The increase in lease liabilities was attributable to the renewal of property and equipment leases in Singapore and Hong Kong.
Contract liabilities, current and non-current
Contract liabilities represent revenue received in advance for services revenues to be rendered under the various performance obligations identified in the cord blood, cord lining and cord tissue banking contracts. As at 30 June 2020, current and non-current contract liabilities were at S$6.1 million and S$62.7 million respectively (31 December 2019: S$5.9 million and S$58.9 respectively).
Income tax payable
As at 30 June 2020, the Group recorded income tax payable of S$2.2 million (31 December 2019: S$1.8 million).
Deferred tax liabilities
As at 30 June 2020, deferred tax liabilities amounted to S$4.9 million (31 December 2019: S$5.2 million), comprising deferred tax liabilities on temporary differences and on intangible assets recognised on business combination.
The outbreak of the COVID-19 in early 2020 has caused fear worldwide and resulted in a negative impact to the global economy. In all the countries that the Group operates in, the Group's services are classified as essential services and as such, the business activities of the Group have remained substantially operational. However, the implementation of social distancing measures to reduce social contact has resulted in restrictions on the Group's ability to carry out physical promotional activities in HY2020. To address this, the Group has ramped up its use of digital marketing campaigns, and has also conducted webinars in various countries to create consumer awareness of its product offerings. With shifting customer preferences away from face-to-face consultations, the Group has embarked on digital initiatives like e-enrolment to continue engaging potential customers in the current environment. The Group will continue to look into the potential ways in which it can engage its existing and potential clients via digital means, which will allow outreach to a potentially larger targeted audience.
In addition, tightened business spending resulting in reductions in selling and marketing expenses and administrative expenses, and the nature and timing of the Group's service delivery has slightly cushioned the impact of COVID-19 on the results for HY2020. The Group only recognises revenue from banking services upon service delivery, which is at the point when the customer gives birth and the sample is stored, while customers typically sign up a few months prior to their delivery. As the COVID-19 situation has generally resulted in the tapering of new customer sign-ups for banking services in HY2020, this revenue trend may continue in the second half of this financial year.
With recurring waves of the outbreak occurring in some of the countries that the Group operates in, the Group expects to continue facing uncertainties arising from COVID-19 in the coming months. Given the rapidly evolving circumstances, the Group will continue to monitor the situation closely and respond accordingly.
Notwithstanding the COVID-19 pandemic, the Group continues to emphasise on increasing public awareness of the benefits of stem-cell banking as well as to seek growth in its diagnostics business through continuous engagement with its clients and their broader families over their lifetime. It continued initiatives like offering additional testing services for cord blood banking to add value to its stemcell banking services while diagnostics offerings have seen relatively positive response from various markets despite the outbreak. With an increasingly technologically-savvy population and a paradigm shift towards digital transformation, the Group is also exploring digital healthcare to better service and empower clients, as well as reduce inefficiencies and costs in service delivery.
As at 30 June 2020, the Group's balance sheet remains strong, and the Group had S$65.3 million in cash and cash equivalents, pledged and unpledged fixed deposits and short-term investments in money market funds. Total debt as a percentage of equity was 3.1%. Although the Group persists in its desire for growth, despite a strong balance sheet and cash position, the Group will likely be taking a more prudent approach to new business opportunities in the near future in light of the current pandemic.
Barring unforeseen developments and exceptional non-operating items, the Group expects to remain profitable for the current financial year ending 31 December 2020.