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VeevaCraneware plc Annual Report for the year ended 30 June 2017 About Craneware Craneware is the leader in automated value cycle solutions that help US provider organisations discover, convert and optimise assets to acheive best clinical outcomes and financial performance. Founded in 1999, Craneware has headquarters in Edinburgh, Scotland with offices in Atlanta, Boston, and Pittsburgh employing over 250 staff. Craneware's market-driven, SaaS solutions normalise disparate data sets, bringing in up-to-date regulatory and financial compliance data to deliver value at the points where clinical and operational data transform into financial transactions, creating actionable insights that enable informed tactical and strategic decisions. To learn more, visit craneware.com. Contents Financial and Operational Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Craneware Value Cycle Solutions® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Chairman’s Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Strategic Report: Operational and Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Strategic Report: Key Performance Indicators and Principal Risks and Uncertainties. . . . . . . . 11 Directors, Secretary, Advisors and Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Directors’ Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Corporate Governance Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Remuneration Committee's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Independent Auditors’ Report to the Members of Craneware plc . . . . . . . . . . . . . . . . . . . . 28 Consolidated Statement of Comprehensive Income for the year ended 30 June 2017 . . . . . . 32 Statements of Changes in Equity for the year ended 30 June 2017 . . . . . . . . . . . . . . . . . . . 33 Consolidated Balance Sheet as at 30 June 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Company Balance Sheet as at 30 June 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Statements of Cash Flows for the year ended 30 June 2017. . . . . . . . . . . . . . . . . . . . . . . . 36 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Craneware plc Annual Report 2017 Quick Facts — Financial $57.8m in revenue $18.0m in adjusted EBITDA1 $53.2m cash at year end 20.0p total dividend for year Financial and Operational Highlights Financial Revenue increased 16% to $57.8m (FY16: $49.8m) Adjusted EBITDA1 increased 13% to $18.0m (FY16: $15.9m) Profit before tax increased 22% to $16.9m (FY16: $13.9m) Basic adjusted EPS increased 20% to $0.514 (FY16: $0.429) and adjusted diluted EPS increased to $0.503 (FY16: $0.423) Total visible revenue increased 13% to $163.8m (FY16 same 3 year period: $145.3m) Continued operating cash conversion above 100% of Adjusted EBITDA1 Cash at year-end of $53.2m (FY16: $48.8m) after payment of $6.4m dividend to shareholders and increased investment of over $3.0m in R&D Proposed final dividend of 11.3p (14.71 cents) per share giving a total dividend for the year of 20.0p (26.04 cents) per share (FY16: 16.5p (22 cents) per share) Renewal rate remains above 100% by dollar value 1 Adjusted EBITDA refers to earnings before acquisition and share related transaction costs, interest, tax, depreciation, amortisation and share based payments. Operational Continued supportive market environment as the US healthcare market evolves towards value-based care, with a critical dependency on accurate financial and operating data Continued high levels of customer acquisition and retention Successful launch of cloud-based Trisus™ platform, with extremely positive customer response Initial sales of Trisus Claims Informatics™, the first product on the Trisus™ platform Early adopters secured for Craneware Healthcare Intelligence, the Group’s new business focused on healthcare Cost Analytics and Resource Efficiency (CARE) Record sales pipeline for the current financial year Revenue $m Adjusted EBITDA1 $m Basic adjusted EPS cents/share 57.8 49.8 41.5 42.6 44.8 18.0 15.9 14.4 12.4 13.1 20 15 10 5 0 60 50 40 30 20 10 0 51.4 1 1 42.9 37.8 32.9 34.0 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 20 15 10 5 0 60 50 40 30 20 10 0 60 50 40 30 20 10 0 60 50 40 30 20 10 0 Craneware plc Annual Report 2017 Craneware Value Cycle Solutions® Craneware Solutions and Services Craneware Value Cycle Solutions span four product families – Patient Engagement, Charge Capture & Pricing, Revenue Collection & Retention, and Cost Analytics. In addition, hospitals of all sizes and types rely on Craneware’s Professional Services to help deliver results that lead to improved financial outcomes. Value Cycle Areas Patient Engagement Charge Capture & Pricing Revenue Recovery & Retention Medical Necessity & Prior Authorisation Patient Responsibility Business Outcomes Procedures Pharmacy Supplies Billing & Claims Analyis Audit Management Denials Management Identify and correct discrepancies between purchased and billed drugs Identify and correct discrepancies between purchased and billed supplies Accurate HCPCS for billable supplies Integrity for all earned revenue I.D. and correct all coding mistakes Identify missed charges Automated audit tracking and execution Automated denial tracking and execution Multiple facility/ department segmentation and workflow Defensible accrual and reserve forecasting Appeals workflow Determine requirement for payers: government & commercial Waiver forms for non-covered procedures Multi-attribute verification Estimate patient responsibility Ensure charge accuracy Ensure chargemaster accuracy across enterprise Creation/ maintenance of physician fee schedule Model contract proposals Model net revenue reimbursement Craneware Solutions InSight Medical Necessity® Trisus® Patient Payment Chargemaster Toolkit® Pharmacy ChargeLink® Supplies ChargeLink® Trisus® Claims Informatics InSight Audit® InSight Denials® Patient Charge Estimator® Physician Revenue Toolkit® Supplies Assistant Pricing Analyzer™ Reference Plus™ Craneware Consulting and Professional Services Cost Analytics Cost of Care Analyse cost, utilisation and reimbursement to Identify the most effective and efficient way to provide care Craneware Healthcare Intelligence CDM Review & Educational Review CDM Standardisation Pricing Optimization Study Supply Banding Charge Capture Performance Improvement Services Interim & full time Success Management Services Revenue Integrity Assessments Appeal Services Trisus Claims Informatics™ Launch The first Trisus product launch took place in June 2017 with Trisus Claims Informatics™. This product enables hospitals and healthcare systems to drive revenue growth and increase compliance by automating claims review through analysing for completeness, accuracy, and patterns of changing charging behaviour. Trisus Claims Informatics is an easy-to-use, cloud-based solution providing predictive analytics around charge capture issues hospitals often experience. These issues include missing charges, incorrect charges, and non-compliant charges. These three main issue types can have major impacts on hospital revenue. In the Trisus solution, drill-down dashboards allow the user to quickly pinpoint areas of high-financial impact. A root cause wizard walks the user through auditing an issue, step-by-step, using yes or no questions to determine the cause. Claim data is matched with remit data with an explanation of benefits viewer to identify remittance variances. Trisus Claims Informatics directs users to the areas with the most financial impact and intuitively guides them through the audit and discovery process. These insights are especially important given revenue-impacting errors related to constant changes in coding and payment rules along with healthcare IT system upgrades. 2 Craneware plc Annual Report 2017 Craneware Value Cycle Solutions® [Cont’d.] Patient Engagement InSight Medical Necessity® A SaaS solution that provides medical necessity validation for all major U.S. payors and Advance Beneficiary Notice (ABN) creation. The software helps reduce accounts-receivable days by preventing medical necessity denials, and facilitates payment communication with patients. Trisus® Patient Payment A SaaS solution that provides hospitals and health systems a way to modernise patient payment by moving collections to the front end, better manage cash flow, reduce bad debt, and improve collection rates while minimising administrative costs. Patient Charge Estimator® This SaaS solution simplifies the process of providing patient bill estimates for inpatient and outpatient services to improve up-front collections and reduce bad debt. Charge Capture & Pricing Chargemaster Toolkit®, Chargemaster Toolkit® Discovery Viewer and Chargemaster Toolkit® Corporate Discovery Viewer Automated SaaS chargemaster management solutions for capturing optimal legitimate reimbursement for providers, while mitigating compliance risk. Chargemaster Toolkit is customisable for any organisation, from small community providers to large healthcare networks, and addresses the challenges that enterprise chargemaster data presents to hospitals by enabling all related chargemaster data to be viewed in one place. Physician Revenue Toolkit® and Physician Revenue Toolkit® – Corporate SaaS solutions for managing physician group KPIs, charges, codes, RVUs, fee schedules, and related information. Pricing Analyzer™ SaaS solution that simplifies the price modelling process, creating a repeatable, well-documented method to establish transparent, defensible and competitive pricing. Reference Plus™ SaaS solution for providers with less than $44 million in operating expenses to perform chargemaster analysis, and efficiently optimise revenue, charge compliance and coding integrity. Pharmacy ChargeLink® Improves charge capture, pricing and cost management, while simplifying the process for ensuring drug coding and billing units are complete and compliant, and establishing and maintaining a connection between a provider’s pharmaceutical purchases and billing. Supplies ChargeLink® Helps optimise reimbursement for supplies, implants, and devices by identifying missing or invalid charges, codable recommendations and establishing and maintaining a connection between supply purchase history and chargemaster, helping to ensure accurate pricing, coding and billing of these supplies. Supporting Modules Online Reference Toolkit® Web-based and mobile-friendly tool for reducing risk by providing access to reference and regulatory resources. Interface Scripting Module Software that automatically uploads chargemaster changes to the patient billing system for accurate billing. Supplies Assistant Web-based, mobile-friendly supplies lookup tool available in Supplies ChargeLink or Online Reference Toolkit. Supplies Assistant enables providers to access Craneware’s proprietary supply master catalog and quickly and correctly code expensive implants and devices. Revenue Recovery & Retention Bill Analyzer Automates claim and coding reviews to identify missed charges, billing errors, and categorise areas of risk to help ensure that all legitimate revenue is captured. Trisus® Claims Informatics Software built on Craneware’s next generation SaaS based product platform that automates claim and coding reviews to identify missed charges, billing errors, and categorise areas of risk to help ensure that all legitimate revenue is captured. InSight Audit® A comprehensive, web-based audit management tool that empowers healthcare organisations to manage government and commercial audits from one central location. InSight Denials® Analyses, tracks, trends and reports on denial data, providing workflow tools for expediting repair and resubmission of denied claims. Cost Analytics Craneware Healthcare Intelligence A new Craneware plc business, developing new solutions to address an emerging but significant market opportunity for healthcare cost analytics. Professional Services Craneware Professional Services provides companion implementation and consulting services that help clients apply best practices and achieve a fast, sustainable return on investment. Craneware augments initial product training with live or self-led web-based training through the Craneware Performance Center and optional fee-based training. Chargemaster Toolkit® is ranked No.1 in the Revenue Cycle – Chargemaster Management market category for the eleventh year in a row (2006 – 2017) in the "2017 Best in KLAS Awards: Software & Services" report, published January 2017. Data © 2017 KLAS Enterprises, LLC. All rights reserved. . www.KLASresearch.com *HFMA staff and volunteers determined that Craneware's Chargemaster Toolkit®, Chargemaster Corporate Toolkit®, Bill Analyzer, Online Reference Toolkit®, and Interface Scripting Module have met specific criteria developed under the HFMA Peer Review Process. HFMA does not endorse or guarantee the use of these products. Craneware is a Microsoft Gold Partner for Application Development. 3 Craneware plc Annual Report 2017 Strong trading in the year The Board is pleased to confirm an increase of 16% in revenue recognised in the year to $57.8m (FY16: $49.8m) and an adjusted EBITDA increase of 13% to $18.0m (FY16: $15.9m). The need to drive value in healthcare, and the challenges this brings, remains a universal topic of focus in the US, providing a supportive market environment for Craneware through the year. Each year brings another layer of change within the US healthcare market, but what remains consistent is the need for our customers’ patients to get better value for their healthcare dollar and for our customers to gain a greater understanding of their financial and operational data in order to ensure their long-term financial health and better outcomes for all. Our customers are increasingly turning to Craneware as a strategic partner to provide solutions that will enable them to preserve revenue and increase the quality of their margins so they can continue to invest in their future and focus on the wellbeing of patients. This has been reflected in the Group’s continued sales success in the year. The strong sales from previous years continue to flow, through to our reported results contributing to current year revenue and adjusted EBITDA growth. This year we are reporting New Sales in the year of $35.4m and Total Value of Contracts of $54.0m. Whilst on the surface not at the level reported in the prior year for total sales (FY16: $58.6m and $82.3m respectively), the difference reflects the prior year announced three large enterprise wide sales, the anticipated impact of the Trisus migration on contract end dates and the cyclically low number of customers due for renewal in the year. On a like for like basis, underlying new sales in the period reflect favourably compared to the prior year of $34.2m for FY16. These sales have contributed to a further 13% increase in our three year visible revenue and continue to support the ongoing growth of the business. At the end of current contracts, we expect to see our renewal rates remain at their current high (well above 100% by dollar value) as customers move to the improvements brought to them by the Trisus Platform. Cash generation in the period was strong, resulting in cash reserves of $53.2m at 30 June 2017 (FY16: $48.8m) after payment of $6.4m in dividends to shareholders, $5.5m of tax payments and investing c.$6.6m into new product development and the Employee Benefit Trust. Investing for the future The Group continues to utilise its cash reserves to invest in our teams, organisation and infrastructure in the US and UK as they are all crucial elements of our build, buy or partner strategy as we further develop our value cycle platform. This includes further development of the Trisus Product Suite and Craneware Healthcare Intelligence, the Group's unique Cost Analytics and Resource Efficiency (CARE) solution. With our healthy cash balances and an undrawn $50m funding facility from the Bank of Scotland, we have the resources to execute upon our strategic vision. First new product sales demonstrate execution of our vision We were delighted by the extremely positive customer response to the launch of our new cloud-based platform, Trisus, with the first product sales secured towards the end of the year. We believe the innovation in Trisus positions us firmly at the forefront of an expanding market opportunity, as the long term shift in US healthcare to value-based care and increased consumerism continues unabated. The first product on the platform, Trisus Claims Informatics™ was launched in June 2017, with early sales recorded towards the year end. During the current financial year we anticipate further product launches on the Trisus Platform. The dedication of our employees in Scotland and the US to our customers and their passion for innovation are the pillars on which our ongoing success is built. I would like to take this opportunity to thank them once again for all their hard work in the year. Their commitment has ensured Craneware has delivered revenue and profit growth for each of its ten years as a public company and has successfully transitioned into the execution phase of our long term strategy. Positive outlook for the business We remain positive that the business environment in the US will continue to be supportive for our business. The investments we have made in the business mean we have the product suite, people and scalability to drive long-term growth and we will continue to build Craneware with the future opportunity in mind. While always mindful of the global and US macro environment, the continued sales success, high levels of revenue visibility, continued cash generation and a record sales pipeline provide the Board with confidence in the success of Craneware in the year ahead. George Elliott Chairman 4 September 2017 Chairman’s Statement “Our customers are increasingly turning to Craneware as a strategic partner to provide solutions that will enable them to preserve revenue and increase the quality of their margins so they can continue to invest in their future and focus on the wellbeing of patients” George Elliott, Chairman 4 Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review “We have proven our ability to execute on our long term vision and are excited by the size of the opportunity now ahead of us" Keith Neilson, CEO and co-founder “By expanding our offerings into operational areas of the hospital, incorporating cost management and combining this with data from the revenue cycle we will provide… unique insight" Craig Preston, CFO Operational Review With continued sales success and double digit financial growth, we have been investing in Craneware’s product suite and people. We made these investments to address the challenges we foresaw taking place in the US healthcare market. Our vision was to be the first to market with a unique range of broad solutions that help our customers in the new era of value-based care. We have expanded our product suite into the value cycle, adding new product areas; developed a new cloud-based technology platform, Trisus; and created a new Group business, Craneware Healthcare Informatics, addressing the significant healthcare analytics market. This will enable greater scalability of the business to address the growing market opportunity. We are delighted to report that, with the early sales of our first Trisus product and the roll out to our first Craneware Healthcare Intelligence customers, this was the year in which we saw our vision become reality. We will continue to invest in the expansion of our business to support our customers as they navigate the ongoing re-imbursement model changes and the move towards value-based care. Through these initial product sales we have proven our ability to execute on our long term vision and are excited by the size of the opportunity now ahead of us. Market and Strategy Market drivers continue unabated While the US healthcare landscape continues to evolve, the fundamentals driving a long-term evolution of the landscape remain the same. The largest healthcare market in the world, the US consistently continues to fall short in its quest for value for the healthcare dollars spent. A greater number of people need access to the healthcare system regardless of any pre- existing medical condition, a greater proportion of the population will soon reach the end of their working life and the cost of delivering healthcare is increasing, all putting an unsustainable burden on the US and its citizens. New regulations, increasing requirements for reliable data analytics, emerging medical techniques and technologies, are all contributing to a major shift in the operational requirements of US healthcare providers. These factors are all driving the need for hospitals to have additional insight into their operational, clinical and financial data – insight our value cycle solutions provide, together with the tools they need to effect change. In the era of value-based care, a hospital provider must understand and reduce the cost of care, increase margins so they can invest in future care delivery and simultaneously improve patient outcomes. We believe that we are among the first to market with solutions addressing the move to value-based care and are committed to continuing to innovate in this space in response to the needs of our customers. Meanwhile, as hospital leadership teams are focusing on controlling costs and increasing levels of care, consumers are facing ever increasing out-of-pocket costs as the healthcare model shifts a significant proportion of the payment responsibility to the patient, via high deductible plans. This is another area of focus for our expanded value cycle product suite. The nearer-term reforms to healthcare which have been discussed over the past year, in light of a change in administration, remain consistent with the need to move toward value-based care – in line with Craneware's strategy. Long-term strategy: to continue to expand our coverage of the value cycle Our strategy is to continue to build on our established market-leading position in revenue cycle solutions and expand our product suite coverage of the value cycle. By expanding our offerings into operational areas of the hospital, incorporating cost management and combining this with data from the revenue cycle we will provide a unique insight into the management and analysis of clinical and operational data, providing the best possible outcomes for all. Our expansion will be achieved through a combination of extensions to the current product set, building products through internal development, targeting potential acquisitions to buy and partnering with other technology and services companies. Craneware's value cycle solutions provide the financial insight and actionable data needed to navigate this evolving landscape and healthcare reform continues to drive a growing demand for all our products. Approximately a quarter of all US hospitals are existing Craneware customers, providing us with a valuable platform for growth. The insight they provide us drives our strategy and we are committed to providing them with long-term strategic support. 5 Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review [Cont’d.] Product Roadmap Our product roadmap has four clear areas of focus: the development of our cloud-based Trisus Enterprise Value Platform; the continued evolution and support of our existing market-leading product suite as we migrate to Trisus; the development of new products to sit upon the Trisus Platform; and the development of cost analytics software by our newly formed Group company, Craneware Healthcare Intelligence. All of these solutions will target areas of the value cycle, being the process and culture by which healthcare providers pursue quality patient outcomes and optimal financial performance, through the management of clinical, operational and financial assets. As we undertake these initiatives and consider the market opportunities these present, the Group has decided to accelerate investment in many areas as we have decided ‘Build’ is the right way forward. Through the development already carried out over the last two years, we now have products or partnerships providing us with access to many of the data sources we require within the key clinical, operational and financial areas of a hospital’s operations in order to build our full suite of value cycle solutions. Some of these areas now have live Craneware products, others are now entering development or will do so in the coming year. We believe the comprehensive nature of our product portfolio, the data that this adds and sophistication of our technology platform, mean Craneware will have the ability to be at the forefront of innovation within the US healthcare market for many years to come. Trisus Enterprise Value Platform We have now launched the Trisus Enterprise Value platform, the next generation of innovation in the value cycle. The cloud-based platform enables a suite of solutions for healthcare providers to identify and take action on risks related to revenue, cost, and compliance. We have a roadmap to move all our solutions onto the platform, as well as continuing to look for innovative combinations of our data sets into new unique product offerings. Trisus is designed to be versatile and expandable, growing alongside our customers as the healthcare industry continues to evolve. The platform provides an environment to gather, process, and deliver data across the continuum of care with an open architecture allowing for synergies between applications. Common components across applications, such as reporting, data import, analytics, workflows, user administration, and more, empower teams within a hospital to collaborate, become more efficient and productive, and provide better financial outcomes. As the healthcare environment continues to change, financial, operational, and clinical outcomes are tied together more than ever before. Trisus is Craneware’s innovative commitment to providing high-value solutions for providers so they can improve margins and provide better patient outcomes. The first product launch took place in June 2017 with Trisus Claims Informatics™. This product enables hospitals and healthcare systems to drive revenue growth and increase compliance by automating claims review through analysing for completeness, accuracy, and patterns of changing charging behaviour. The Trisus Patient Payment solution was also made available to early adopters during the year. The solution effectively addresses growing consumerisation within healthcare. The past five years have seen an explosion of high-deductible health plans and an increasing out-of-pocket burden for patients. In many hospitals, patient payments represent a fast growing proportion of their revenue, yet is the most difficult and expensive portion to collect with a high reputational risk associated with pursuing delinquent individuals. The Trisus Patient Payment Module is a solution designed to increase patient billing satisfaction through the provision of flexible, web and mobile-friendly payment options and simplification of the billing process, while also improving point-of-service collection rates. Following successful completion of the early adopter phase we expect full general release later this calendar year. Further components of Trisus will be released throughout the current calendar year and beyond. With the componentised nature of the Trisus architecture we expect the roadmap for future releases to accelerate as we complete on these initial solutions. Craneware Healthcare Intelligence In the second half of fiscal year 2016, Craneware formed a new Group company, Craneware Healthcare Intelligence, to develop and market Cost Analytics and Resource Efficiency (CARE) software to the US healthcare industry. CARE is a vital component within the emerging value cycle solutions market. The insight into costs, combined with correct reimbursement will enable our customers to better understand and improve their margins; allowing a greater understanding of resources available to invest and in turn drive better patient outcomes both today and for the future. With the additional insight our products provide into Physician variability across the continuum of care, Craneware is able to demonstrate the tangible and valuable benefits of combining financial, operational and clinic data particularly in better patient outcomes. We believe this area of the value cycle represents a market opportunity several times larger than that of our existing product portfolio. Under the leadership of our SVP, Health Analytics, progress has continued at pace within this newly formed business. We now have a team of people in place with the initial phase of product development complete and the first early adopters secured, combining our initial models and algorithms with live hospital data. The results of this phase will provide us with invaluable insight as we approach general product launch scheduled for later in the year. Acquisitions The Board continues to assess acquisition opportunities to complement the Group's organic growth strategy and increase our product coverage of the value cycle. The Board adheres to a rigorous set of criteria to evaluate acquisition opportunities, including quality of earnings, strategic fit and product offering. In addition to the Company's cash reserves, an undrawn $50 million funding facility provides the Company with available resources to carry out strategic acquisitions if and when these criteria are met. Sales and Marketing The Group delivered good levels of sales to all segments of the US healthcare market, demonstrating continued sales momentum and the benefits of a supportive market environment. Going forward the sales pipeline continues to be at record highs with opportunities across all strata of hospital, providing confidence that we are on a continuing path of accelerated revenue and profit growth in future years. During the year, sales to existing customers increased as a proportion of total new sales made. All new hospital sales provide opportunities for further product sales in the future. The average length of contracts with new customers continues to be in-line with our historical norms of approximately five years. This year, however, for all other contracts we have anticipated the crossover dates of new product availability on the Trisus Platform and the impact for each individual customer contract as part of our migration strategy. It is anticipated that our phased migration of all current products to the Trisus Platform will be complete no later than 2021. As we factor in the resulting anticipated migration dates the consequence of this is to reduce the average effective length of all customer contracts signed in the year to approximately 4 years. Normalising FY16 contracts to the same average term and considering just underlying contracts (i.e. excluding the three large system sales announced in the prior year), like for like sales in FY16 would be $34.2m as compared to $35.4m in FY17. 6 Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review [Cont’d.] At the end of the contract term, we expect to see our renewal rates remain at their current high levels (well above 100% by dollar value), along with incremental additional sales, as customers move to the improvements brought to them by the Trisus Platform. Awards Chargemaster Toolkit® was named Category Leader in the "Revenue Cycle – Chargemaster Management" market category for the eleventh consecutive year in the annual "2017 Best in KLAS Awards: Software & Services." KLAS's annual "Best in KLAS" report provides unique insight gathered from thousands of healthcare organisations across the US. The report includes client satisfaction scores and benchmark performance metrics. Financial Review Following our return to double digit growth in the prior year, it is pleasing to report this growth has continued in both revenue and adjusted EBITDA. As such, we are reporting a growth in revenues for the financial year under review of 16% to $57.8m (FY16: $49.8m) which has resulted in an adjusted EBITDA of $18.0m (FY16: $15.9m). Underlying these results continues to be the contracts we sign with our hospital customers. These new contracts provide a license for a customer to access specified products throughout their license period. This license period on average, for a sale to a new customer, is five years. In calculating averages, we only take the contract length up to the first renewal point/break clause for that specified product. It is at the end of these license periods or a mutually agreed earlier date that customers renew with us or will modify contracts to license the Trisus Platform. It is anticipated that future renewals will be significantly enhanced by the move to Trisus. We measure renewal rates by dollar value as this specifically ties to how we are sustaining the underlying annuity base of revenue which is demonstrated through the three-year visible revenue detailed below. This metric measures ‘last annual value’ of all customers due to renew in the current year and compares it to actual value these customers renew at (in total), including upsell and cross-sell i.e. to demonstrate that we are maintaining or increasing our annuity. This metric for the current year is at 110%. $m 60 50 40 30 20 10 0 Three Year Visible Revenue 0.2 5.7 50.1 0.2 14.9 38.8 0.3 24.6 29.0 FY18 FY19 FY20 As at 30 June 2017 Contracted Renewals Other recurring revenue 7 Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review [Cont’d.] We further build the annuity with our new product sales to new or existing customers (part way through their current license term). These elements make up our Annuity SaaS business model (which is described in detail below) and is designed to deliver long term sustainable growth reducing the impact of any short term fluctuations in sales levels or contract timing. It is anticipated that our phased migration of all current products to the Trisus Platform will be complete no later than 2021. This has meant that our reported average contract length across all contracts signed in the year, for the current “specified products”, has been impacted on a case by case basis to reflect this planned migration. As a result, the average contract length for all contracts signed in the year reduces from approximately five years to four years with a resultant effect on calculated Total Value of Sales in the Year. We are reporting New Sales in the year of $35.4m and Total Value of Contracts of $54.0m. Whilst on the surface not at the level reported in the prior year for total overall sales (FY16: $58.6m and $82.3m respectively) the difference reflects the prior year announced enterprise wide sales, the anticipated impact of the Trisus migration on contract end dates and the cyclically low number of customers due for renewal in the year. These sales have contributed to a further 13% increase in our three year visible revenue. This level of sales continues to support the ongoing growth of the business. underlying signed contracts. As we sign new hospital contracts that provide our customers access to our products for an average life of five years, we will see the revenue from any new sales recognised over this underlying contract term. Business Model The Group’s ‘Annuity SaaS’ business model and associated revenue recognition is designed to ensure the long-term growth and stability of the Group. Through this prudent approach to revenue recognition and consistent application of this model, the Group ensures it is focused on sustainable growth irrespective of any short term fluctuations in sales levels. The Annuity SaaS business model delivers a ‘smoothing’ effect as the majority of the revenue resulting from all sales in any one period will be recognised over future periods. Individual sales add to the Group’s long term visibility of revenue under contract. 60 Under our model we recognise software license revenue and any minimum payments due from our ‘other route to market’ contracts evenly over the life of the $m 30 As well as the incremental license revenues we generate from each new sale, we normally expect to deliver an associated professional services engagement. This revenue is typically separately identifiable from the license and is recognised as we deliver the service to the customer, usually on a percentage of completion basis. The nature and scope of these engagements will vary depending on both our customer needs and which of our solutions they have contracted for. However these engagements will always include the implementation of the software as well as training the hospital staff in its use. As a result of the different types of professional services engagement, the period over which we deliver the services and consequently recognise all associated revenue will vary, however we would normally expect to recognise this revenue over the first year of the contract. 60 $m 30 0 60 $m 30 0 Reported Revenue 0 FY13 FY14 FY15 FY16 FY17 Revenue 60 $m 30 0 60 $m 30 FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Revenue Revenue New Sales 60 $m 30 0 FY13 FY14 FY15 FY13 FY14 FY15 FY16 FY17** New Sales Large Enterprise Sales Renewals* Early Contract End Dates** 0 60 $m 30 FY16 0 FY17** FY13 FY14 FY15 FY16 New Sales FY17** Large Enterprise Sales Early Contract End Dates** FY13 FY14 FY15 FY16 FY17** New Sales Large Enterprise Sales Early Contract End Dates** Renewals Early Contract End Dates** 60 60 *As the Group signs new customer contracts for between three to nine years, the number and value of customers’ contracts coming to the end of their term (“renewal”) will vary in any one year. This variation along with whether customers auto-renew on a one year basis or renegotiate their contracts for up to a further nine years, will impact the total contract value of renewals in that year ** Contract end dates (therefore TCV) impacted by phased Trisus Migration $m 30 $m 30 0 8 0 FY13 FY14 FY15 FY16 FY17** FY13 FY14 FY15 FY16 FY17** Renewals Early Contract End Dates** Renewals Early Contract End Dates** Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review [Cont’d.] In any individual year, we would normally expect around 10% – 20% of revenues reported by the Group to be from services performed. Sales, Revenue and Revenue Visibility As a result of how revenue is recognised under the Annuity SaaS business model – ‘sales’ and ‘revenue’ have different meanings and are not interchangeable. The charts on page 8 show both our reported revenues and the total value of contracts signed in the relevant years split between sales of new products (to both new and existing hospital customers) and the value of renewing products with existing customers at the end of their current contract terms. As the majority of the revenue resulting from sales in the year will be recognised over future years, the financial statements do not appropriately reflect the valuable ‘asset’ that is this contracted, but not yet recognised, revenue. As such, at every reporting period, the Group presents its “Revenue Visibility”. This KPI identifies revenues which we reasonably expect to recognise over the next three year period, based on sales that have already occurred. This “Three Year Visible Revenue” metric includes future revenue under contract revenue generated from renewals (calculated at 100% dollar value renewal) other recurring revenue As we are signing multi-year contracts with our customers and at the end of these contracts we are, on average, renewing these customers at 100% of dollar value, the Group is consistently building an underlying annuity base of revenue. The Three Year Revenue Visibility KPI is a forward looking KPI and therefore will always include some judgement. To help assess this, we separately identify different categories of revenue to better reflect any inherent future risk in recognising these revenues. Future revenue under contract, is, as the title suggests, subject to an underlying contract and therefore once invoiced will be recognised in the respective years (subject to future collection risk that exists with all revenue). Renewal revenues are contracts coming to the end of their original contract term (e.g., five years) and will require their contracts to be renegotiated and renewed for the revenue to be recognised. As this category of revenue is assumed to renew at 100% of dollar value, we consistently monitor and publish this KPI (at each reporting period) to ensure the reasonableness of this assumption. The final category “Other recurring revenue” is revenue that we would expect to recur in the future but is monthly or transactional in its nature and as such there is increased potential for this revenue not to be recognised in future years, when compared to the other categories. The Group’s total visible revenue for the three years as at 30 June 2017 (i.e. visible revenue for FY18, FY19 and FY20) identifies $163.8m of revenue which we reasonably expect to benefit the Group in this next three year period. This visible revenue breaks down as follows: future revenue under contract contributing $117.9m of which $50.1m is expected to be recognised in FY18, $38.8m in FY19 and $29.0m in FY20 revenue generated from renewals contributing $45.2m; being $5.7m in FY18, $14.9m in FY19 and $24.6m in FY20 other revenue identified as recurring in nature of $0.7m Gross Margins Typically, we expect the gross profit margin to be between 90 – 95%. The gross profit for the FY17 was $54.2m (FY16: $46.8m) representing a gross margin percentage of 93.8% (FY16: 93.9%) which is towards the top of our historical range. This reflects the correct matching of incremental costs incurred to obtain the underlying contracts with the associated revenue being recorded. Earnings The Group presents an adjusted earnings figure as a supplement to the IFRS based earnings figures. The Group uses this adjusted measure in our operational and financial decision-making as it excludes certain one-off items, so as to focus on what the Group regards as a more reliable indicator of the underlying operating performance. We believe the use of this measure is consistent with other similar companies and is frequently used by analysts, investors and other interested parties. Adjusted earnings represent operating profits excluding costs incurred as a result of acquisition and share related activities, share related costs including IFRS 2 share based payments charge, depreciation and amortisation (“Adjusted EBITDA”). In the prior year this also excluded the ‘other income’ arising out of the conclusion of the contingent consideration arising from the prior year: the acquisition of Kestros. Adjusted EBITDA has grown in the year to $18.0m (FY16: $15.9m) an increase of 13%. This reflects an Adjusted EBITDA margin of 31.1% (FY16: 31.8%). This is consistent with the Group’s continued approach to making investments in line with the revenue growth. The Group also takes opportunities where they exist to accelerate investments in certain areas, such as development, to further build for future growth whilst continually managing to ensure the efficiency of the investments we make. Operating Expenses The increase in net operating expenses (to Adjusted EBITDA) reflects our policy of investing in line with revenue growth, increasing by 17% to $36.2m (FY16: $30.9m). However we have also taken the opportunity to increase our investment in Product Development. Product innovation and enhancement continues to be core to the Group’s future; our customers are facing a market that continues to evolve towards value-based reimbursements and the Group is in a unique position with its value cycle strategy to help them meet the challenges these new reimbursement models bring. The Operating Review provides significant detail of our current ongoing development programs, including the Trisus Platform and the portfolio of products that will be part of this platform. We continue our Build, Buy or Partner strategy to build out this portfolio of products. As we undertake these initiatives and consider the market opportunities these present, the Group has decided to accelerate investment in many areas as we have decided ‘Build’ is the favoured way forward. We do this whilst maintaining our current product offerings and ensuring they remain market-leading. This has resulted in an increase in the cost of development related to our current products and therefore a charge in the period of $9.1m (FY16: $7.7m), a 19% increase and therefore ahead of our revenue growth. In addition, we have made further investments relating to the development of the new product offerings (“Build”), this includes our new cost analytics tool ‘Trisus CARE’. As these products have yet to be made available to our customers, the associated incremental costs have been capitalised, this has resulted in $3.5m (FY16: $2.0m) of capitalised development spend in the year. These capitalised amounts represent further investment in our future and have been undertaken as we have concluded that it represents the most efficient and cost effective way to fulfil our value cycle strategy. We expect to see both the levels of development expense and capitalisation continue the current trends as we progress with building out this solution set. Cash and Bank Facilities We measure the quality of our earnings through our ability to convert them into operating cash. During the year we have seen continued high levels of cash conversion, achieving over 100% conversion of our adjusted EBITDA into operating cash. The success of these very high levels of cash conversion has enabled us to grow our cash reserves to $53.2m (FY16: $48.8m). These cash levels are after paying $5.5m in taxation (FY16: $2.3m), investing $3.1m in our new Employee Benefit Trust, the $3.5m further investment in new product development and returning $6.4m (FY16: $6.0m) to our shareholders by way of dividends. 9 Craneware plc Annual Report 2017 Strategic Report: Operational and Financial Review [Cont’d.] We retain a significant level of cash reserves and balance sheet strength to fund acquisitions as suitable opportunities arise. To supplement these reserves, the Group retains a funding facility from the Bank of Scotland of up to $50m. Whilst no draw down of this facility occurred in the year, the Group continues to investigate strategic opportunities to add to the value cycle strategy. Balance Sheet The Group maintains a strong balance sheet position. The level of trade and other receivables has decreased in comparison to the prior year. This is a result of the positive levels of cash collection, especially during the last quarter of the year. Every year as we make sales, we pay out amounts relating to sales commissions; these costs are incremental costs in obtaining the underlying contracts. Total sales commissions are based on the total value of the contract sold; however for the purposes of the Statement of Comprehensive Income, a lower proportion of revenue from the contract value is recognised in the year. As a result we charge an equivalent percentage of the sales commission, thereby properly matching revenue and incremental expense. The resulting prepayment of $5.9m (FY16: $6.0m) is the balance to be charged against future profit as we recognise the associated revenue. As we only pay the sales commission upon receipt of the first annual payment from the customer, we remain cash flow positive from any new sale. Deferred income levels reflect the amounts of the revenue under contract that we have invoiced and/ or been paid for in the year, but have yet to recognise as revenue. This balance is a subset of the total visible revenue we describe above and reflected through our three year visible revenue metric. Deferred income, accrued income and the prepayment of sales commissions all arise as a result of our Annuity SaaS business model described above and we will always expect them to be part of our balance sheet. They arise where the cash profile of our contracts does not exactly match how revenue and related expenses are recognised in the Statement of Comprehensive Income. Overall, levels of deferred income are significantly more than accrued income and the prepayment of sales commissions, we therefore remain cash flow positive in regards to how we recognise revenue from our contracts. Currency The functional currency for the Group (and cash reserves) is US dollars. Whilst the majority of our cost base is US-located and therefore US dollar denominated, we do have approximately one quarter of the cost base based in the UK relating primarily to our UK employees (and therefore denominated in Sterling). As a result, we continue to closely monitor the Sterling to US dollar exchange rate, and where appropriate, for example as was the case in the year, consider hedging strategies. During the year, we have seen some benefit of exchange rate movements, with the average exchange rate throughout the year being $1.2688 as compared to $1.4837 in the prior year. This benefit has allowed us to continue to release further investment whilst maintaining profit margins. Taxation The Group generates profits in both the UK and the US, the overall levels are determined by both the proportion of sales in the year and the level of professional services income recognised. The Group’s effective tax rate remains dependent on the applicable tax rates in these respective jurisdictions. In the current year the effective tax rate has seen the benefit of a tax deduction related to share option exercises that occurred in the year, as well as the reducing rate of UK Corporation Tax and as such the current year effective tax rate is 20% (FY16: 24%). EPS In the year adjusted EPS has seen the benefit of the increased levels of adjusted EBITDA combined with the lower effective tax rate reported above and as such has increased 20% to $0.514 (FY16: $0.429) and adjusted diluted EPS has increased to $0.503 (FY16: $0.423). Dividend The Board recommends a final dividend of 11.3p (14.71 cents) per share giving a total dividend for the year of 20p (26.04 cents) per share (FY16: 16.5p (22 cents) per share). Subject to confirmation at the Annual General Meeting, the final dividend will be paid on 7 December 2017 to shareholders on the register as at 10 November 2017, with a corresponding ex-Dividend date of 9 November 2017. The final dividend of 11.3p per share is capable of being paid in US dollars subject to a shareholder having registered to receive their dividend in US dollars under the Company's Dividend Currency Election, or who register to do so by the close of business on 10 November 2017. The exact amount to be paid will be calculated by reference to the exchange rate to be announced on 10 November 2017. The final dividend referred to above in US dollars of 14.71 cents is given as an example only using the Balance Sheet date exchange rate of $1.30197/£1 and may differ from that finally announced. Outlook We are delighted to report that, with record levels of revenue and profitability, the launch of our Trisus Platform with sales secured for the first Trisus product (Trisus Claims Informatics™), and the launch of Craneware Healthcare Intelligence, this was the year in which we saw our unique vision of the value cycle turn from concept to reality. While laying out our vision for the value cycle over the last two years, Craneware has delivered double digit growth in our key metrics, including revenue and profit, supported by sales success throughout the period. We have expanded our product suite into the value cycle; developed a new cloud-based technology platform, Trisus; and created a new Group business, Craneware Healthcare Intelligence, all significantly increasing the Company’s total addressable market. At the same time we have been investing in improving our customers’ experience and have returned in excess of $15m to shareholders by way of dividends and share buy backs. The unceasing evolution of the US healthcare market towards value-based care presents us with an ongoing, growing market opportunity and the investments we have made mean we now have the potential to deliver against this expanding opportunity. With our sales pipeline increasing each year, this increased scalability and opportunity, combined with our high levels of revenue visibility, strong cash position and extensive customer base provide us with confidence in Craneware’s ongoing success. Keith Neilson Chief Executive Officer 4 September 2017 Craig Preston Chief Financial Officer 4 September 2017 10 Craneware plc Annual Report 2017 Strategic Report: Key Performance Indicators and Principal Risks and Uncertainties Key Performance Indicator Review Revenue Growth Revenue Growth 2017 $57.8m 16% 2016 $49.8m 11% Revenue for the year grew by 16%. This results from the combination of underlying sales levels combined with the Group’s Annuity SaaS revenue recognition model. The recognition model, combined with continued high levels of customer retention, results in additional sales increasing the quantum of recurring revenue reported each year and through the long term nature of our contracts also increases the underlying visible revenue (see KPI below). Three Year Revenue Visibility Three Year Revenue Visibility 2017 2016 $163.8m $145.3m The Group’s revenue recognition model means the full benefit of current year’s sales are not reflected in the current year financial statements. However, new sales add to the underlying ‘annuity’ of recurring revenue and to demonstrate this the Group produces a ‘Three Year Revenue Visibility’ KPI. This metric compares the growth in the three years contracted revenue, revenue subject to renewal and other recurring revenue, for the same three year period starting 1 July 2017. Full details of how this is calculated are detailed in the financial review section of the Strategic Report. Adjusted EBITDA Growth Adjusted EBITDA Growth 2017 $18.0m 13% 2016 $15.9m 10% We take a measured approach to our investment, ensuring to invest to support the future growth of the Group. The increasing revenue growth has allowed us to continue and in certain areas accelerate this investment whilst delivering Adjusted EBITDA growth. By taking this approach, we aim to release additional investment, in line with revenue growth, with the focus on delivering profitable growth to all stakeholders. Adjusted EPS Adjusted EPS Growth 2017 2016 51.4 cents 42.9 cents 18% 13% Adjusted EPS growth demonstrates the Group’s overall profitability after taking into account the taxation in the year and any changes in share capital. The Group generates profits in both the UK and the US, the overall level of which is determined by both the level of sales in the year and the level of professional services income. The Group’s effective tax rate remains dependent on the applicable tax rates in each respective jurisdiction. Cash Cash 2017 $53.2m 2016 $48.8m The Group continues to convert very high levels of the Adjusted EBITDA reported in the year into operating cash flows which has resulted in an increase in cash balances of 9%. Overall Operating cash conversion continues above our long term target of 100%. 11 Craneware plc Annual Report 2017 Strategic Report: Key Performance Indicators and Principal Risks and Uncertainties [Cont’d.] Principal Risks and Uncertainties To deliver continued sustainable growth, the Group recognises the need to minimise the likelihood and impact of key risks. These risks are both general in nature i.e., business risks faced by all businesses, and more specific to the Group and the market in which it operates. The nature of the US healthcare industry and associated risks are detailed in the Operational Review on pages 5 to 10. The risks outlined here are those principal risks and uncertainties that are material to the Group. They do not include all risks associated with the Group and are not set out in any order of priority. Management of Growth Issue: The Group continues to grow and is planning for further significant growth both organically and through acquisition. This could place strain on the Group’s resources including management bandwidth. Actions: The Group has and continues to make significant investments to add to available resources and increase bandwidth at all levels of management including the Board of Directors. The Group’s annuity SaaS business model combined with the detailed forecasting processes provides visibility to expected growth rates. This provides a foundation when planning in advance, including any additional resourcing necessary as a result of this growth. To ensure the correct infrastructure to support growth, assessments are performed and improvements are made within systems, policies and procedures and business controls are upgraded, as appropriate, across the Group. US Healthcare Evolution and Reform Issue: The US healthcare industry continues to evolve, with the value based reimbursement model and a shift towards consumerisation, the outcome and nature of this market is subject to continual change and as such could impact the Group’s market opportunity. Actions: The Group has taken steps to ensure it stays at the forefront of how the industry is interpreting current proposals and actions they are taking. It has and it continues to develop significant industry expertise at all levels of management including the Board of Directors. It actively promotes developing further experience throughout the wider organisation by, amongst other things: key hires adding to the industry expertise across the Group, both at operational and strategic levels; having independent industry experts attend and speak at internal and external Company events; regular attendance by senior management at healthcare forums and industry education events; and customer forums. The Group’s “value cycle” strategy strengthens our position as a trusted financial performance partner to hospitals and it continually enhances and expands its product offerings to meet the evolving challenges. These strategies keep the Group at the forefront of industry developments. Dependence on Key Executives and Personnel Issue: Due to the size of the Group significant reliance is placed on a few members of the executive and senior management team, the retention of which cannot be guaranteed. Actions: The Group has and will continue to expand and strengthen its senior management team, including the Board of Directors, as appropriate. The Group continues to utilise programs to identify, train and mentor the management and talent who will be the leaders of the future. In regards to retention, the Remuneration Committee continues to monitor and develop the remuneration packages of key personnel to ensure they are both competitive and include appropriate long term incentives; this is explained further in the Remuneration Committee’s Report on pages 23 to 27. Market Consolidation Issue: The evolving market in US Healthcare continues to place significant pressure on Healthcare providers. Consequently, there is a significant amount of ongoing market consolidation. The result is the Group’s market is increasingly dominated by larger Hospital Networks. Failure to enhance products, ensure scalability or add to the current product suite could significantly limit the Group’s market opportunity and leave it unable to meet its customers’ evolving needs. Actions: The Group’s “value cycle” strategy and Trisus Platform, combined with the continued evolution of the product suite, positions the Group forefront of providing solutions to US healthcare providers of all sizes. In addition, the Group continues to innovate and develop new products to meet evolving market needs, such as the ongoing development of Trisus ‘CARE’, the Group’s new product in the cost analytics area. Intellectual Property Risk Issue: Failure to protect, register and enforce (if appropriate) the Group’s Intellectual Property Rights could materially impact the Group’s future performance. Actions: The Group will continue to register its trademarks and copyrights and protect access to its confidential information, as appropriate. The Group would vigorously defend itself against a third-party claim should any arise. The Group also has in place strict physical and data security processes and encryption to protect its intellectual property. Data and cyber security Issue: Security of customer, commercial and personal data poses increasing reputational and financial risk to all businesses. In particular, the sharp rise in cyber and data related crime presents a significant challenge in terms of securing data and systems against attack. Actions: Whilst it is not possible to completely eliminate data and cyber security risk, it is clear that effective mitigation now go beyond building and operating security controls. While the Group will continue to invest in the strict physical and data security systems and protocols mentioned above it also carries specific insurance in this regard. The Group also recognises and supports that a sustained evolution of culture within the organisation which embeds security across the business. Competitive Landscape Issue: New entrants to the market or increased competition from existing competitors could significantly impact the Group’s market opportunity. Actions: The Group continually monitors its competitive landscape, including both existing and potential new market entrants. Significant barriers to entry continue to exist, including but not limited to the significant data content built over the Group’s history which exists within its products. The Group continues to ensure its products are platform agnostic and actively seeks partnerships with other healthcare IT vendors. Acquisition Risk Issue: The Group has a stated acquisition strategy. Any acquisition carries with it an inherent risk, including failure to identify material matters that could adversely affect future Group performance. Actions: The Group and Board members individually have relevant experience in regards to completing acquisitions and this experience has been added to in recent years through key appointments to the Operations Board. In addition, and where appropriate, the Board appoints independent professional advisors to assist in the consideration of potential acquisitions and to assist management in the due diligence process. The principal financial risks are detailed in Note 3 to the financial statements. How the Board determines and manages risks is detailed in the Corporate Governance report on page 21. In summary, and as explained in the Operational Review section of this Strategic Report, the US healthcare market is not immune to the macro- economic climate and, with the increasing focus and requirements of the evolving healthcare marketplace, the Group expects the market to continue to be competitive. The Group aims to remain at the forefront of product innovation and delivery, through a combination of in-house development and specific acquisition opportunities. This requires the recruitment, retention, and reward of skilled staff, alongside responsiveness to changes, and the opportunities that result, as they arise. Craig Preston Chief Financial Officer 4 September 2017 12 Craneware plc Annual Report 2017 Directors, Secretary, Advisors and Subsidiaries Directors G R Elliott (non-executive, Chairman) K Neilson C T Preston N P Heywood (non-executive) (Resigned 8 November 2016) R F Verni (non-executive) C Blye (non-executive) R Rudish (non-executive) Company Secretary & Registered Office C T Preston 1 Tanfield Edinburgh EH3 5DA Stockbrokers and Nominated Advisors Peel Hunt LLP 120 London Wall London EC2Y 5ET Registrars Capita Registrars Ltd The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Bankers Bank of Scotland The Mound Edinburgh EH1 1YZ The Royal Bank of Scotland plc 36 St. Andrew Square Edinburgh EH2 2YB Clydesdale Bank 20 Waterloo Street Glasgow G2 6DB Barclays Commercial Bank Aurora House 120 Bothwell Street Glasgow G2 7JT HSBC Bank plc 7 West Nile Street Glasgow G1 2RG Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants & Statutory Auditors Atria One 144 Morrison Street Edinburgh EH3 8EX Solicitors Pinsent Masons LLP Princes Exchange 1 Earl Grey Street Edinburgh EH3 9AQ Subsidiaries Craneware, Inc. 3340 Peachtree Rd NE Suite 850 Atlanta, GA 30326 Craneware InSight, Inc. 3340 Peachtree Rd NE Suite 850 Atlanta, GA 30326 Craneware Health 1 Tanfield Edinburgh EH3 5DA Craneware Healthcare Intelligence, LLC 12570 Perry Highway Suite 110 Wexford, PA 15090 13 Craneware plc Annual Report 2017 Board of Directors The Directors of the Company and their responsibilities within the Group are set out below: George R Elliott, 64 — Non-Executive Chairman :: Appointed 10 August 2007 George is non-executive Chairman of Calnex Solutions Ltd, an Ethernet test equipment manufacturer, Cooper Software Ltd, an enterprise and business intelligence solutions consultancy, Indigovision Group plc, a developer of complete end-to-end video security solutions, Optoscribe Ltd, which develops and supplies high performance 3D waveguide solutions for the data and telecommunications industries and Visionware Ltd, a developer of master data management solutions. He is also a non-executive director of Par Equity Holdings Ltd, a venture capital company, which focuses on early stage high growth potential companies. Since 2007 he has been non-executive chairman/director of a number of technology companies, including MicroEmissive Displays Group plc, Corsair Components Inc, Kewill plc, Summit Corporation plc and Cupid plc. From 2000-2007 George was Chief Financial Officer of Wolfson Microelectronics plc, which was a leading global provider of high performance mixed-signal semiconductors to the consumer electronics market. Previously, he was Business Development Director at McQueen International Ltd (now Sykes), a manufacturing and support services provider for software publishers, where he was responsible for strategic sales and marketing. George, formerly a partner of Grant Thornton, is a member of the Institute of Chartered Accountants of Scotland and has a degree in Accountancy and Finance from Heriot-Watt University. Keith Neilson, 48 — Chief Executive Officer & Co-founder Keith co-founded Craneware in 1999 and has served as its CEO ever since. Under Keith’s guidance, Craneware became recognised as the pioneer in value cycle management and a leading provider of superior products and professional services. Keith’s direction has helped Craneware to win multiple prestigious awards in such areas as international achievement, business growth strategy and innovation. Keith was named The Entrepreneurial Exchange’s “Emerging Entrepreneur of the Year 2003” and was a finalist in the 2004 World Young Business Achiever Award, winning the Award of Excellence in the Business Strategy category. He received the UK Software & Technology Entrepreneur of the Year Award from Ernst & Young in 2008 and was the Insider Elite Young Business Leader of the Year in 2009. Prior to launching Craneware, Keith worked primarily in international management, where he handled sales, marketing and technical consulting for companies with operations around the world. He studied Physics at Heriot-Watt University, Edinburgh, receiving a bachelor’s degree in 1991. Keith is an active member of the Young Presidents Organisation (YPO), a syndicate member and Partner in Par Equity LLP, a board member of Code Clan, the Scottish Digital Skills Academy and the Scottish North American Business Council (SNABC). Keith is also proud to be a Patron of the Princes Trust and a Trustee of the Polar Academy both charitable organisations that work for the benefit of young people. Craig T Preston, 46 — Chief Financial Officer :: Appointed 15 September 2008 Craig was appointed to the Board on 15 September 2008, just as the company was entering its second year as a publicly traded corporation on the London Stock Exchange. As CFO, he directs Craneware’s financial operations in both the United Kingdom and United States. Craig has significant experience in senior financial roles with other private and public technology companies, including those with a multi-national presence. Prior to Craneware, he was group director of finance and company secretary at Intec Telecom Systems plc. Earlier, he served as corporate development manager at London Bridge Software plc. During his time there, he also held the role of CFO for Phoenix International, a previously NASDAQ-traded software company, following its acquisition by London Bridge. Earlier in his career, Craig worked for Deloitte in both the United Kingdom and United States. Craig has a degree in Accounting and Financial Management from the University of Sheffield. He is also a member of the Institute of Chartered Accountants in England and Wales. 14 Craneware plc Annual Report 2017 Board of Directors [Cont’d.] Ron F Verni, 69 — Non-Executive Director :: Appointed 1 May 2009 Ron is currently a director of On Deck Capital, and on the Board of Advisors of the Robinson College of Business. Before that he was President & CEO of Sage Software, Inc, and a member of the Board of Directors of the Sage Group plc. Under his leadership, the company grew from less than $160 million in revenue to over $1 billion, from under 1,000 employees to over 5,000, and from 1 million business customers to over 2.5 million. Ron also engineered over 20 acquisitions and oversaw their successful integration into the company. Prior to Sage Software, Ron was President and CEO of Peachtree Software, Inc., a leading pioneer in business management solutions for small to medium size businesses. Ron also was a Vice President of Marketing with Automatic Data Processing, President and CEO of NEBS Software, Inc., and the founder and CEO of ASTEC Software. Colleen Blye, 57 — Non-Executive Director :: Appointed 12 November 2013 Colleen Blye is the Executive Vice President and Chief Financial Officer for Montefiore Health System and Albert Einstein College of Medicine. Montefiore Health System consists of eleven hospitals and an extended care facility, it is a premier academic medical center and includes the Albert Einstein College of Medicine. Colleen has a distinguished background in large, complex healthcare organizations. Prior to joining Montefiore, she served as Executive Vice President and Chief Financial Officer of Catholic Health Services of Long Island, an integrated healthcare delivery system comprising six hospitals and three nursing homes. Earlier, she served as Executive Vice President for Finance and Integrated Services at Catholic Health Initiatives, a health system with 102 hospitals across the United States. Her previous experience includes responsibility for treasury management, revenue cycle, financial reporting and planning, third-party contracting, supply chain, accounts payable, payroll, and information technology. Colleen Blye is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Healthcare Financial Management Association. Russ Rudish, 65 — Non-Executive Director :: Appointed 28 August 2014 Russ Rudish has more than 30 years' experience in serving the healthcare industry, both in the United States and internationally. Russ holds a directorship in Rudish Health Solutions, LLC, and StarBridge Advisors, LLC, both healthcare professional services firms. Russ is also a principal in Healthcare IT Leaders and Run Consultants, both of which provide IT staff augmentation services. Between 2006 and 2014, Russ served as partner and Global Sector Leader for Healthcare at Deloitte Touche Tohmatsu, where he led the $2 billion global consulting, audit, tax and financial advisory business, developing the firm's global health care strategy. He is an active speaker and contributor to thought leadership on today's most pressing healthcare business issues. 15 Craneware plc Annual Report 2017 During the year the Company paid an interim dividend of 8.7p (10.7 cents). The Directors are recommending the payment of a final dividend of 11.3p (14.71 cents) per share giving a total dividend of 20p (26.04 cents) per share based on the results for 2017 (2016: 16.5p (22.0 cents)). Subject to approval at the Annual General Meeting, the final dividend will be paid on 7 December 2017 to shareholders on the register as at 10 November 2017. The level of dividend proposed for the year continues the Company’s stated progressive dividend policy based on the Group’s retained annual earnings. The level of distributions will be subject to the Group’s working capital requirements and the ongoing needs of the business. Research and Development Activities The Group continues its development programme of software products for the US healthcare market. The primary focus of this development continues to be the enhancement and expansion of the product suite to support the Group’s value cycle strategy. Full details of the development activities and the Group’s roadmap is provided in the Strategic Report contained in pages 5 to 12. The Directors regard investment in development activities as a prerequisite for success in the medium and long-term future. During the year development expenditure amounted to $9.1m (2016: $7.7m) net of expenditure capitalised of $3.5m (2016: $2.0m). Financial Instruments The financial risk management strategy of the Group, its exposure to currency risk, interest rate risk, counterparty risk and liquidity is set out in Note 3 to the financial statements. Going Concern The Strategic Report on pages 5 to 12 contains information regarding the Group’s activities and an overview of the development of its products, services and the environment in which it operates. The Group’s revenue, operating results, cash flows and balance sheet are detailed in the financial statements and explained in the Financial Review on pages 5 to 10. The Directors, having made suitable enquiries and analysis of the financial statements, including the consideration of: have determined that the Group has adequate resources to continue in business for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing the consolidated and Company financial statements. Directors The Directors of the Company are listed on pages 14 and 15. The Directors have the power to manage the business of the Company, subject to the provisions of the Companies Act, the Memorandum and Articles of Association of the Company, and to any directions given by special resolution, including the Company’s power to purchase its own shares. The Company’s Articles of Association may only be amended by a special resolution of the Company’s shareholders. Details of the Directors’ service contracts and their respective notice terms are detailed in the Remuneration Committee’s Report on page 25. Share Capital The Company’s issued and fully paid up share capital at 30 June 2017 was 26,961,709 Ordinary Shares of 1p each (2016: 26,850,248 Ordinary Shares). The shares are traded on the Alternative Investment Market (‘AIM’), a market operated by the London Stock Exchange. The Company’s Articles of Association, which are available on the Company’s website, contain the details of the rights and obligations attached to the shares. During the year, 111,461 Ordinary Shares (2016: 17,666 Ordinary Shares) were allotted to satisfy employee share options which were exercised in accordance with The Craneware plc Employee’s Share Option Plan 2007. Details of the Company’s employee share plans, including the number of ordinary shares subject to employee share plan awards, are included in Note 8 to the financial statements. The Company has established an Employee Benefit Trust (EBT), ‘The Craneware plc Employee Benefit Trust’. As at 30 June 2017 the EBT held 242,930 Craneware plc Ordinary Shares. The EBT waived its right to dividends in the year ended 30 June 2017. Further details regarding the EBT are contained in Note 18 to the financial statements. net cash reserves; 20.0 continued cash generation; and Annuity SaaS business model; Directors’ Report The Directors present herewith their report and the audited consolidated financial statements for the year ended 30 June 2017. Principal Activities and Business Review The Group's principal activity continues to be the development, licensing and ongoing support of computer software for the US healthcare industry. The Company is required by the Companies Act to include a business review in this report. This includes an analysis of the development and performance of the Group during the financial year and its position at the end of the financial year, including relevant key performance indicators (principally revenue, adjusted operating profit (before acquisition costs and share related payments, share based payments, depreciation and amortisation), visibility of revenue over the next three years and cash generation during the year). Detailed information on all matters required is presented in the Strategic Report contained in pages 5 to 12 and is incorporated into this report by reference. A description of the principal risks and uncertainties facing the Group is also presented in the Strategic Report. Where the Directors’ Report, Chairman’s Statement and Operational Review contain forward looking statements, these are made by the Directors in good faith, based on the information available to them at the time of their approval of this report. Consequently, such statements should be treated with caution due to their inherent uncertainties, including both economic and business risk factors underlying such forward looking statements or information. Financial Results and Dividends The Group’s revenue for the year was $57.8m (2016: $49.8m) which has generated an adjusted profit before tax (before acquisition related matters (in Fiscal Year 2016)) of $17.2m (2016: $15.0m). The full results for the year, which were approved by the Board of Directors on 4 September 2017, are set out in the accompanying financial statements and the notes thereto. Dividends/Share (pence) 11.5 12.5 14.0 16.5 *Subject to approval at AGM FY13 FY14 FY15 FY16 FY17 16 Craneware plc Annual Report 2017 Directors’ Report [Cont’d.] Authority for purchase of own shares Authorisation was given by shareholders at the Annual General Meeting on 8 November 2016 for the Company to purchase up to 1,347,434 Ordinary Shares. The Company has not purchased any of its own shares during the financial year (2016: nil). A resolution to renew this authority will be proposed at the 2017 Annual General Meetings. Directors and their Interests The interests of the Directors who held office at 30 June 2017 and up to the date of this report in the share capital of the company, were as follows:- G R Elliott K Neilson 2017 15,650 3,459,718 3,475,368 2016 15,650 3,504,130 3,519,780 Directors’ interests in share options are detailed in the Remuneration Committee’s Report on page 27. Substantial Shareholders As at 1 August 2017, the Company had been notified of the following beneficial interests in 3% or more of the issued share capital pursuant to section 793 of the Companies Act 2006: Indemnity of Directors and Officers Under the Company’s Articles of Association and subject to the provisions of the Companies Act, the Company may and has indemnified all Directors or other officers against liability incurred by them in the execution or discharge of their duties or exercise of their powers, including but not limited to any liability for the costs of legal proceedings where judgement is given in their favour. In addition, the Company has purchased and maintains appropriate insurance cover against legal action brought against Directors and officers. Corporate Social Responsibility & Environmental Policy The Group is committed to maintaining a high level of social responsibility. It is the Group’s policy to support and encourage environmentally sound business operations, with aspects and impact on the environment being considered at Board level. Recognising that the Group’s operations have minimal direct environmental impact, the Group aims to ensure that: it meets all statutory obligations; where sensible and practical, it encourages working practices, such as teleconferencing, teleworking and electronic information exchange that reduce environmental impact; and No. of Ordinary £0.01 Shares % of issued share capital recycles waste products wherever possible, encouraging use of environmentally friendly materials, and disposing safely of any non- recyclable materials. Liontrust Asset Management 4,782,455 17.74 Customers The Group treats all its customers with the utmost respect and seeks to be honest and fair in all relationships with them. The Group provides its customers with products and levels of customer service of outstanding quality. Community The Group seeks to be a good corporate citizen respecting the laws of the countries in which it operates and adhering to best social practice where feasible. It aims to be sensitive to the local community’s cultural, social and economic needs. K Neilson Hargreave Hale W G Craig 3,459,718 12.83 2,568,964 2,450,258 9.53 9.09 5.29 AXA Investment Managers 1,425,000 Shroder Investment Management 1,178,824 4.37 Baillie Gifford & Co Ltd 1,111,840 D Paterson 884,758 4.12 3.28 Artemis Investment Management 880,689 3.27 FIL Investment International 873,655 3.24 Charitable and Political Contributions As part of the Group’s commitment to Corporate Social Responsibility it has continued to develop its “Craneware Cares” program. The focus of Craneware Cares is to raise awareness and funds for charity. The focus for 2017 was the support of the Children’s Hospice Association Scotland (CHAS) in the UK and the Shriners Hospital for Children in the US. For 2018 the focus will again be the support of CHAS in the UK and Creative Philanthropy in the US. Fund raising activities have already begun and these supplement the Volunteer Time Off program where Craneware staff take paid leave to support projects and charities in their communities. Neither the Company nor its subsidiaries made any donation for political purposes in fiscal years 2017 or 2016. Employees and Employee Involvement The Group recognises the value of its employees and that the success of the Group is due to their efforts. The Group respects the dignity and rights of all its employees. The Group provides clean, healthy and safe working conditions. An inclusive working environment and a culture of openness are maintained by the regular dissemination of information. The Group endeavours to provide equal opportunities for all employees and facilitates the development of employees’ skill sets. A fair remuneration policy is adopted throughout the Group. The Group does not tolerate any sexual, physical or mental harassment of its employees. The Group operates an equal opportunities policy and specifically prohibits discrimination on grounds of colour, ethnic origin, gender, age, religion, political or other opinion, disability or sexual orientation. The Group does not employ underage staff. The general policy of the Group is to welcome employee involvement as far as it is reasonably practicable. Employees are kept informed by meetings, regular updates and web page postings. In addition, the Group’s UK and US senior management teams meet regularly to review performance against the Group’s strategic aims and development roadmaps. The Group maintains core values of honesty, integrity, hard work, service and quality and actively promotes these values in all activities undertaken on behalf of the Group. 17 Craneware plc Annual Report 2017 Auditors and Disclosure of Information to Auditors Each Director, as at the date of this report, has confirmed that insofar as they are aware there is no relevant audit information (that is, information needed by the Company’s auditors in connection with preparing their report) of which the Company’s auditors are unaware, and they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to be re-appointed and a resolution for reappointment will be proposed at the Annual General Meeting. Approved by the Board of Directors and signed on behalf of the Board by: Craig Preston Company Secretary 4 September 2017 Directors’ Report [Cont’d.] Employment of Disabled Persons Applications for employment by disabled persons are always fully considered, bearing in mind the respective aptitudes and abilities of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and the appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of a disabled person should, as far as possible, be identical to that of a person who does not suffer from a disability. Policy on Payment of Payables Relationships with suppliers and subcontractors are based on mutual respect, and the Group seeks to be honest and fair in its relationships with suppliers and subcontractors, and to honour the terms and conditions of its agreements in place with such suppliers and subcontractors. As a UK company, Craneware plc is bound by the laws of the UK, including the Bribery Act 2010, in respect of our conduct within and outside of the UK. In addition, we uphold all laws relevant to countering bribery and corruption in all the jurisdictions in which we operate. It is the Group’s normal practice to make payments to suppliers in accordance with agreed terms and conditions, generally within 30 days, provided that the supplier has performed in accordance with the relevant terms and conditions. Trade payables at 30 June 2017 represented, on average 18 days purchases (2016: 19 days) for the Group and 13 days purchases (2016: 21 days) for the Company. Annual General Meeting The resolutions to be proposed at the Annual General Meeting, together with explanatory notes, appear in a separate Notice of Annual General Meeting which is sent to all shareholders and made available on the Company’s website at www.craneware.com. The proxy card for registered shareholders is distributed along with the notice. Company Registration The Company is registered in Scotland as a public limited company with number SC196331. Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. In preparing these financial statements, the Directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRSs as adopted by the European Union and IFRSs issued by IASB have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 18 Craneware plc Annual Report 2017 Corporate Governance Report The Board of Directors ("the Board") acknowledges the importance and continued applicability for this reporting period of the principles set out in the UK Corporate Governance Code issued in April 2016 (the “Code”). Although the Code is not compulsory for AIM listed companies, the Board recognises the importance of good corporate governance practices and therefore has applied the principles in line with best practice for an AIM listed company. This Report identifies how it has complied with both the individual principles and the ‘spirit’ of the Code as a whole. The Code itself defines the purpose of corporate governance being “to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” It is this overarching objective that the Board has sought to achieve in applying the Code principles. Leadership The role of the Board “Every Company should be headed by an effective Board which is collectively responsible for the long-term success of the company.” The Company’s Board continues to be headed by its Chairman George Elliott and comprises two executive Directors, Keith Neilson, Chief Executive Officer and Craig Preston, Chief Financial Officer along with three further non-executive Directors, Ronald Verni (Senior Independent Director), Colleen Blye and Russ Rudish. As previously announced, Neil Heywood who was a non-executive Director for over 10 years did not stand for re-appointment at the 2016 AGM and resigned from the Board on 8th November 2016. Detailed biographies of all Directors are contained on pages 14 and 15. The Board meets regularly to discuss and agree on the various matters brought before it, including the Group’s trading results. The Board is well supported by the Group’s Operations Board (details of which are provided below) and a broader senior management team, who collectively have the qualifications and experience necessary for the day to day running of the Group. There is a formal schedule of matters reserved for the Board, which include approval of the Group’s strategy, annual budgets and business plans, acquisitions, disposals, business development, annual reports and interim statements, plus any significant financing and capital expenditure plans. As part of this schedule, the Board has clearly laid out levels of devolved decision making authority to the Group’s Operations Board. The Board has further established an Audit Committee and a Remuneration Committee details of which are provided below. The Board does not have a separate Nominations Committee as the Company has again taken advantage of the Code’s relaxations available to smaller companies and incorporated this function within the remit of the entire Board. Attendance of Directors at Board and Committee meetings convened in the year, along with the number of meetings that they were invited to attend, are set out below: No. Meetings in year Executive Directors K Neilson C T Preston Non-Executive Directors G R Elliott N P Heywood* R Verni C Blye R Rudish** d r a o B 8 8/8 8/8 8/8 3/3 7/8 8/8 8/8 n o i t a r e n u m e R e e t t i m m o C 3 - - - 1/1 3/3 3/3 2/2 e e t t i t i d u A m m o C 3 - - - 1/1 3/3 3/3 2/2 * Resigned 8th November 2016 ** Appointed to the Remuneration Committee and the Audit Committee on 8th November 2016 Where any Board member has been unable to attend Board or Committee meetings during the year, their input has been provided to the Company Secretary ahead of the meeting. The relevant Chairman then provides a detailed briefing along with the minutes of the meeting following its conclusion. As detailed in the Directors’ Report on page 17, the Company maintains appropriate insurance cover against legal action brought against Directors and officers. The Company has further indemnified all Directors or other officers against liability incurred by them in the execution or discharge of their duties or exercise of their powers. Group’s Operations Board which comprises the Chief Financial Officer and six further members of the Senior Management Team. The day-to-day operation of the Group’s business is managed by this Operations Board, subject to the clearly defined authority limits. The Chairman “The chairman is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role.” George Elliott was appointed Chairman of the Board in August 2007, shortly before the Company listed on the AIM market. At that time the then Board satisfied themselves that he was independent, fulfilling the requirements of the Code. George has a depth of experience both as Chairman and a non-executive director for a number of other companies, including other listed companies, details of which can be found in the Directors’ biographies on page 14. Non-Executive Directors “As part of their role as members of a unitary board, non- executive directors should constructively challenge and help develop proposals on strategy.” The Board has appointed Ronald Verni as Senior Independent Director. In this role, Ronald provides a sounding board for the Chairman as well as providing an additional channel of contact for shareholders, other Directors or employees, if the need arises. In addition to matters outlined above, there is regular communication between executive and non-executive Directors, including where appropriate, updates on matters requiring attention prior to the next Board meeting. The non-executive Directors meet, as appropriate but no less than annually, without executive Directors being present and further meet annually without the Chairman present. Effectiveness Division of Responsibilities “There should be a clear division of responsibilities at the head of the company between the running of the Board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.” The Composition of the Board “The Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.” The Board has established clearly defined and well understood roles for George Elliott as Chairman of the Company, and Keith Neilson as Chief Executive Officer. The Chairman is responsible for the leadership of the Board, ensuring its effectiveness and setting its agenda. Once strategic and financial objectives have been agreed by the Board, it is the Chief Executive Officer’s responsibility to ensure they are delivered upon. To facilitate this, Keith Neilson as CEO chairs the The composition of the Board has been designed to give a good mix and balance of different skill sets, including significant experience in: high growth companies; software and healthcare sectors; entrepreneurial cultures; senior financial reporting; both UK and US companies; acquisitions; and other listed companies. 19 Craneware plc Annual Report 2017 Corporate Governance Report [Cont’d.] Through this mix of experience, the Board and the individual Directors are well positioned to set the strategic aims of the Company as well as drive the Group’s values and standards throughout the organisation, whilst remaining focused on their obligations to shareholders and meeting their statutory obligations. The Board reviews on an annual basis the independence of each non-executive Director. In making this consideration the Board determines whether the Director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the Director’s judgement. Appointments to the Board “There should be a formal, rigorous and transparent procedure for the appointment of new directors to the Board.” When a new appointment to the Board is to be made, consideration is given to the particular skills, knowledge and experience that a potential new member could add to the existing Board composition. A formal process is then undertaken, usually involving external recruitment agencies, with appropriate consideration being given, in regards to executive appointments, to internal and external candidates. Before undertaking the appointment of a non-executive Director, the Chairman establishes that the prospective Director can give the time and commitment necessary to fulfil their duties, in terms of availability both to prepare for and attend meetings and to discuss matters at other times. Any conflicts, or potential conflicts, of interest are disclosed and assessed prior to a new Director’s appointment to ensure that there are no matters which would prevent that person from accepting the appointment. The Group has procedures in place for managing conflicts of interest and Directors have continuing obligations to update the Board on any changes to these conflicts. This process includes relevant disclosure at the beginning of each Board meeting. If any potential conflict of interest arises, the Articles of Association permit the Board to authorise the conflict, subject to such conditions or limitations as the Board may determine. Commitment “All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.” All Board Directors recognise the need to allocate sufficient time to the Company for them to be able to meet their responsibilities as Board members. All non-executive Directors’ contracts include minimum time commitments; however these are recognised to be the minimums. Details of the other directorships held by each Board member are provided in the Director biographies on pages 14 and 15. The Board has evaluated the time commitments required by these other roles and does not believe it affects their ability to perform their duties with the Company. No executive Director currently holds any other directorship of a listed company. The non-executive Director contracts are available for inspection at the Company’s registered office and are made available for inspection both before and during the Company’s Annual General Meeting. In addition, the non-executive Directors periodically meet with the Group’s Operations Board on an informal basis. This provides all Directors with direct access to the senior management of the Company and allows for better understanding of how the strategy set by the Board is being implemented across the Group. Evaluation "The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.” Development “All Directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.” The Chairman is responsible for ensuring that all the Directors continually update their skills, their knowledge and familiarity with the Group in order to fulfil their role on the Board and the Board’s Committees. Updates dealing with changes in legislation and regulation relevant to the Group’s business are provided to the Board by the Company Secretary/Chief Financial Officer and through the Board Committees. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are properly complied with and that discussions and decisions are appropriately minuted. Directors may seek independent professional advice at the Company’s expense in furtherance of their duties as Directors. Training in matters relevant to their role on the Board is available to all Board Directors. New Directors are provided with an induction in order to introduce them to the operations and management of the business. Appropriate Information “The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.” In setting the Board agendas, the Chairman, in conjunction with the Company Secretary, ensures input is gathered from all Directors on matters that should be included. Board papers are then issued in advance of meetings to ensure Board members have appropriate detail in regards to matters that will be covered, thereby encouraging openness and healthy debate. At a minimum these board papers include the Financial Results of the Group and a report from both the Chief Executive Officer and the Chief Financial Officer. Following Neil Heywood’s resignation, the Board reviewed the skills and attributes of the individual Directors to identify a skills set that would be required from a new non-executive Director. In addition, the remuneration and audit committees were reviewed for both performance and skill sets. In regards to the committees, Russ Rudish has been appointed to both committees and Colleen Blye has been appointed chairman of the Audit Committee. The Board is proposing a full formal evaluation, in the current Financial Year. This is expected to take the form of a detailed questionnaire to be completed by each Director. This evaluation will include a review of the performance of individual Directors including the Chairman and the Board Committees. Overall the Board has concluded that its performance in the period under review had been satisfactory. This review process will be repeated and updated as appropriate. The Board has considered the Code’s recommendation that the evaluation of the Board be carried out externally at least every three years. The Board recognises this recommendation is not applicable to AIM listed companies and has determined it was not necessary to carry out an external review in the current year. Re-election “All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.” Under the Company’s Articles of Association, at every Annual General Meeting, at least one-third of the Directors who are subject to retirement by rotation, are required to retire and may be proposed for re-election. In addition, any Director who was last appointed or re-appointed three years or more prior to the AGM is required to retire from office and may be proposed for re-election. Such a retirement will count in obtaining the number required to retire at the AGM. New Directors, who were not appointed at the previous AGM, automatically retire at their first AGM and, if eligible, can seek re-appointment. 20 Craneware plc Annual Report 2017 Corporate Governance Report [Cont’d.] However, the Board recognises the Code’s recommendation that all Directors should stand for re-election every year, and whilst not a requirement, the Board has decided to adopt this recommendation as best practice. As such, all Directors will retire from office at the Company’s forthcoming AGM. It is the intention of all Directors to stand for re-appointment. Accountability Financial and Business Reporting “The Board should present a fair, balanced and understandable assessment of the company’s position and prospects.” The Board recognises its responsibilities, including those statutory responsibilities laid out on page 18. An assessment of the Group’s market, business model and performance is presented in the Chairman’s Statement and the Strategic Review on pages 5 to 12. As detailed on page 16 of the Directors’ Report, the Board has confirmed that it is appropriate to adopt the going concern basis in preparing financial statements. Risk Management and Internal Control “The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.” The Directors recognise their responsibility for the Group’s system of internal control, and have established systems to ensure that an appropriate and reasonable level of oversight and control is provided. These systems are reviewed for effectiveness annually by the Audit Committee and the Board. The Group’s systems of internal control are designed to help the Group meet its business objectives by appropriately managing, rather than eliminating, the risks to those objectives. The controls can only provide reasonable, not absolute, assurance against material misstatement or loss. Executive Directors and senior management meet to review both the risks facing the business and the controls established to minimise those risks and their effectiveness in operation on an ongoing basis. The aim of these reviews is to provide reasonable assurance that material risks and problems are identified and appropriate action taken at an early stage. From this review the Company maintains its internal risk register which forms the foundation of the Board and the Audit Committee review process. The annual financial plan is reviewed and approved by the Board. Financial results, with comparisons to plan and forecast results, are reported on at least a quarterly basis to the Board together with a report on operational achievements, objectives and issues encountered. The quarterly reports are supplemented by interim monthly financial information. Forecasts are updated no less than quarterly in the light of market developments and the underlying performance and expectations. Significant variances from plan are discussed at Board meetings and actions set in place to address them. Approval levels for authorisation of expenditure are at set levels and cascaded through the management structure with any expenditure in excess of pre-defined levels requiring approval from the executive Directors and selected senior managers. Measures continue to be taken to review and embed internal controls and risk management procedures into the business processes of the organisation and to deal with areas of improvement which come to the management’s and the Board’s attention. Metrics and quality objectives continue to be actively implemented and monitored as part of a continual improvement programme. Details of the principal risks and uncertainties facing the Group are detailed in the Strategic Report on page 12. The principal financial risks are detailed in Note 3 to the financial statements. Audit Committee and Auditors “The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the Company's auditors.” An Audit Committee has been established to assist the Board with the discharge of its responsibilities in relation to internal and external audits and controls. The Audit Committee will normally meet at least three times a year. The Audit Committee was chaired by Neil Heywood until he left the Board in November 2016. At that time, Colleen Blye took over as chair and Russ Rudish joined the Committee, its other member is Ronald Verni. The Chief Financial Officer, Chief Executive Officer and other senior management attend meetings by invitation and the Committee also meets the external auditors without management present. Colleen Blye, as chair of the Audit Committee has recent and relevant financial experience. Details of how the Audit Committee has discharged its responsibilities are provided below. Remuneration The Level and Components of Remuneration “Executive Directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied.” The Company has established a Remuneration Committee to assist the Board in this area. This Committee comprises non-executive directors and is chaired by Ronald Verni and its other members are Colleen Blye and Neil Heywood, until he left the Board in November 2016, at which point Russ Rudish joined the Committee. When appropriate Keith Neilson, as Chief Executive Officer, is invited to attend meetings (except where matters under review by the Committee relate to him). The Committee has responsibility for making recommendations to the Board on the remuneration packages of the executive Directors, and monitor the level and structure of remuneration for senior management, this includes: making recommendations to the Board on the Company’s policy on Directors’ and senior staff remuneration, and to oversee long-term incentive plans (including share option schemes); ensuring remuneration is both appropriate to the level of responsibility and adequate to attract and/ or retain Directors and staff of the calibre required by the Company; and ensuring that remuneration is in line with current industry practice. The Committee has presented its Remuneration Report on pages 23 to 27, which details the work undertaken operating under its terms of reference (which are available at the Company’s registered office) to discharge its responsibilities. Procedure “There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.” Details of how the Committee and Board have discharged their responsibilities in this area are detailed in the Remuneration Committee’s Report on pages 23 to 27. 21 Craneware plc Annual Report 2017 Corporate Governance Report [Cont’d.] Relations with Shareholders Dialogue with Shareholders “There should be a dialogue with shareholders based on mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.” The Company engages in full and open communication with both institutional and private investors and responds promptly to all queries received. In conjunction with the Company’s brokers and other financial advisors all relevant news is distributed in a timely fashion through appropriate channels to ensure shareholders are able to access material information on the Company’s progress. To facilitate this: All shareholders are invited to attend the AGM and are encouraged to take the opportunity to ask questions. The primary point of contact for shareholders on operational matters is Keith Neilson as CEO and Craig Preston as CFO. The primary point of contact for shareholders on corporate governance and other related matters is George Elliott as Chairman. Ronald Verni as Senior Independent Director is available as a point of contact should a shareholder not wish to contact the Chairman for any reason. Keith Neilson and Craig Preston meet regularly with shareholders, normally immediately following the Company’s half year and full year financial results announcements, to discuss the Group’s performance and answer any questions. The Board monitors the success of these meetings through anonymous evaluations from both shareholders and analysts performed by the Company’s Broker and Financial PR advisor. The Company’s website (at www.craneware.com) has a section for investors which contains all publicly available financial information and news on the Company. Constructive Use of the AGM “The Board should use the AGM to communicate with investors and to encourage their participation.” The Board encourages attendance at its AGM from all shareholders. The Notice of AGM together with all resolutions and explanations of these resolutions are sent at least 20 working days before the meeting. All Directors, where possible, make themselves available to answer any questions shareholders may have. Results of all votes on resolutions are published as soon as practicable on the Company’s website. The Audit Committee During the year the Audit Committee, operating under its terms of reference (which are available at the Company’s registered office), discharged its responsibilities, including reviewing and monitoring: interim and annual reports information including consideration of the appropriateness of accounting policies and material assumptions and estimates adopted by management; developments in accounting and reporting requirements; external auditors’ plan for the year-end audit of the Company and its subsidiaries; the Committee’s effectiveness; the systems of internal control and their effectiveness, reporting and making new recommendations to the Board on the results of the review and receiving regular updates on key risk areas of financial control; the requirements or otherwise for an internal audit function; the performance and independence of the external auditors concluding, in a recommendation to the Board, on the reappointment of the auditors by shareholders at the Annual General Meeting. The auditors provide annually a letter to the Committee confirming their independence and stating the methods they employ to safeguard their independence; the audit and non-audit fees charged by the external auditors; and the formal engagement terms entered into with the external auditors. The Committee has also reviewed the arrangements in place for internal audit and concluded, due to the current size and complexity of the Company, that a formal internal audit function was not required. Under its terms of reference, the Audit Committee is responsible for monitoring the independence, objectivity and performance of the external auditors, and for making a recommendation to the Board regarding the appointment of external auditors on an annual basis. The Group’s external auditors, PricewaterhouseCoopers LLP, were first appointed as external auditors of the Company for the year ended 30 June 2003. The Audit Committee has also implemented procedures relating to the provision of non-audit services by the Company’s auditors, which include non-audit work and any related fees over and above a de-minimis level to be approved in advance by the Chairman of the Audit Committee. Details of the fees paid to the auditors for audit and non-audit services are shown in Note 6 to the financial statements. The Audit Committee has considered the level of non-audit services and the related fees paid and has concluded they do not compromise auditor independence. AIM Rule Compliance Report Craneware plc is quoted on AIM and as a result the Company has complied with AIM Rule 31 which requires the company to: have in place sufficient procedures, resources and controls to enable its compliance with the AIM Rules; seek advice from its Nominated Advisor (“Nomad”) regarding its compliance with the AIM Rules whenever appropriate and take that advice into account; provide the Company’s Nomad with any information it reasonably requests in order for the Nomad to carry out its responsibilities under the AIM Rules for Nominated Advisors, including any proposed changes to the Board and provision of draft notifications in advance; ensure that each of the Company’s Directors accepts full responsibility, collectively and individually, for compliance with the AIM Rules; and ensure that each Director discloses without delay all information which the Company needs in order to comply with AIM Rule 17 (Disclosure of Miscellaneous Information) insofar as that information is known to the Director or could with reasonable diligence be ascertained by the Director. Approved by the Board of Directors and signed on behalf of the Board by: Craig Preston Company Secretary 4 September 2017 22 Craneware plc Annual Report 2017 Remuneration Committee's Report This report sets out Craneware plc’s remuneration and benefits provided to Directors for the financial year under review. A resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be presented for approval. As an AIM listed company, Craneware plc is not required to comply with the Directors’ Remuneration Report regulations requirements under Main Market UK Listing Rules or those aspects of the Companies Act 2006 applicable to listed companies. Remuneration Committee The Company has a Remuneration Committee (“the Committee”) in accordance with the recommendations of the UK Corporate Governance Code. The members of the Committee are Ronald Verni (Chairman), Colleen Blye and Neil Heywood until he left the Board in November 2016 at which point Russ Rudish was appointed to the Committee in his place. None of the Committee has any personal financial interests, other than as shareholders (in the case of Neil Heywood), in matters directly decided by this Committee, nor are there any conflicts of interests arising from cross directorships or day to day involvement in the running of the business. The Company’s Chief Executive Officer on occasion will attend meetings, at the invitation of the Committee, to advise on operational aspects of implementing existing and proposed policies. The Company Secretary acts as secretary to the Committee. Under the Committee Chairman’s direction, the Chief Executive Officer and the Company Secretary have responsibility for ensuring the Committee has the information relevant to its deliberations. In formulating its policies, the Committee has access, as required, to professional advice from outside the Company and to publicly available reports and statistics. The Committee met three times during the year and the meeting attendance is shown on page 19. The remuneration of the non-executive Directors is determined by the Board as a whole within limits set out in the Articles of Association. The non-executive Directors do not participate in performance related bonus or share based incentive arrangements. Policy Executive remuneration packages are designed to attract, motivate and retain Directors of the calibre necessary to achieve the Group’s growth objectives and to reward them for enhancing shareholder value. The main elements of the remuneration package for executive Directors are: Directors’ salaries into line. In addition, to recognise the performance of the Company over this extended period, a one-off payment was made to address the shortfall in compensation that had occurred over these previous years (“Benchmark Adjustment”). These one-time payments, which are non-pensionable, are detailed separately in the table on page 26. Pension entitlement (ii) The Company operates an open enrolment pension scheme in which all UK employees, including executive Directors, are entitled to participate. As part of this scheme, the Company has matched employee contributions into the scheme, this matching has increased from 1% to 2% during the course of the year. In addition, the Company pays a fixed sum to a personal pension plan on behalf of the Chief Executive Officer. Benefits in kind (iii) Executive Directors are entitled to private medical insurance, life insurance and permanent health insurance. (iv) Annual performance related bonus Under the annual performance related bonus plan, executive Directors are eligible to earn a cash bonus (non-pensionable) payment based on targets that are set by the Committee. In determining these targets, the Committee’s objective is to set targets that reflect challenging financial performance in the current year, but also provide for the future growth of the Company. Maximum bonus entitlements were set at a level that allowed additional growth of overall remuneration for out-performance of targets but still remains below the appropriate levels of the benchmarking exercise referred to above. As these financial targets were partially met in the current year, a proportion of the performance related bonus entitlement for the year is payable and is part of the bonus amounts detailed in the table below. basic annual salary and benefits in kind; annual performance related bonus; pension entitlement; and, long term incentives. The Company’s policy is that a substantial proportion of the remuneration of executive Directors should be performance related. None of the executive Directors holds any outside appointments with any other publicly traded company. Directors’ remuneration The Committee develops overall Directors’ remuneration packages to ensure both the short and long-term objectives of the Company are met and potentially exceeded, thereby ensuring that the Directors are incentivised to maximise return to the Company’s shareholders. The remuneration package for the executive Directors comprises: Basic salary (i) This is normally reviewed annually, or when an individual’s position or responsibilities change and is normally paid as a fixed cash sum monthly. As reported in the Remuneration Committee Report section of the 2016 Annual Report, the Committee had identified that executive remuneration, was significantly below the levels recommended by previous benchmarking exercises and had been so for a number of years. This was despite the performance of the Company which had seen both growth in the financial results during this period but also significant shareholder value. Also during this time, benchmarking studies had been performed for all employees with annual adjustments being made to bring compensation in line with benchmark to ensure remuneration remained competitive for all employees. As such, in April 2017, the executive Directors’ basic salary levels were reviewed and adjustments were made to bring the 23 Craneware plc Annual Report 2017 Remuneration Committee's Report [Cont’d.] Share options and LTIP awards (v) During the year and historically since September 2007, the Company operated the Craneware Employees’ Share Option Plan 2007 (“2007 Share Option Plan”) from which, and at the discretion of the Committee, executive Directors and other employees (including senior management) could be awarded share options under this scheme. As explained in the Remuneration Committee’s Report section of the 2016 Annual Report, the 2007 Share Option Plan is approaching the tenth anniversary of its original adoption date (after which no further grants can be made under its terms) and therefore the Committee conducted a review to determine whether it remained the most appropriate form of incentivisation vehicle for the Company going forward. In September 2016, the Chief Executive Officer was awarded share options under this scheme, details of which are shown in the table on page 27. Options issued under this scheme are normally exercisable three years after the date the options were granted, provided the executive is still employed at the date of exercise. These options are subject to stringent performance criteria based on the share price performance in the preceding three year period as compared to a comparator base of companies. Each option grant is split into three tranches (of no more than a 1/3 of the total options granted) which allows the performance criteria to be assessed annually (against the preceding three year period). If performance is below the median of the comparator group over the relevant three year period then no options vest that year. The amount of options that vest increases as performance reaches top quartile when the relevant tranche of options vests in full. No more than 1/3 of each option grant can vest in any single year and options do not become exercisable until three years from the original grant date. As a result, performance criteria are based on share price performance over a five year period which must be maintained over that period if all options granted are to become exercisable. These performance criteria were met in the current year and as a result all options that were subject to vesting in the current year vested but only become exercisable on the third anniversary of the grant of the original option. New share plans The Company implemented three new discretionary employee share plans in the year ended 30 June 2017, following approval and authorisation obtained from shareholders at the Annual General Meeting on 8 November 2016: The Craneware plc Long Term Incentive Plan (2016) (the “LTIP”); The Craneware plc Schedule 4 Company Share Option Plan (2016) (the "Schedule 4 Option Plan”); and The Craneware plc Unapproved Company Share Option Plan (2016) (the "Unapproved Option Plan”).; The main conclusion from that review was that, whilst the 2007 Share Option Plan had, in the past, provided a satisfactory mechanism for delivering performance- based rewards to the most senior employees, the Committee wished to update the Companys approach in line with best and market practice by implementing a new arrangement, the LTIP, that will allow for the grant of awards that require the holder to pay no (or a nominal) price for their shares. Although the new LTIP will be used as the primary means of incentivising senior management going forward, the Committee was also of the view that it would be useful for the Company to retain the flexibility to grant “market value” options if the need arises. For example, the Committee may decide that, in order to responsibly manage the share based payment charge associated with its incentive programme in any year, it would be appropriate for a participant’s awards to be granted partly under the LTIP and partly as a market value option. Accordingly, authority from shareholders was obtained at the 2016 AGM for two new share option plans as direct replacements for the 2007 Share Option Plan. The Schedule 4 Option Plan allows for the grant of tax advantaged options to UK based participants over shares worth up to £30,000 per individual; and the Unapproved Option Plan is used to grant options where the above limit has been reached or where the relevant individual is based overseas. If, in any year, executive directors are given a combination of LTIP awards and options under the Schedule 4 / Unapproved Option Plans, the same form of performance condition will apply across each of the arrangements and the individual limits on participation will take into account both forms of grant. Awards granted under the new share plans in the year ended 30 June 2017 In March 2017 the Chief Financial Officer was granted a combination of a conditional share award under the LTIP and share options under each of the Schedule 4 Option Plan and the Unapproved Option Plan. The total value of these awards at date of grant was equal to 100% of the basic salary for the Chief Financial Officer. These awards are included in the tables on page 27. Conditional share awards and / or share options were granted to certain other employees (including senior management) in March 2017 under these new share plans. The vesting of the awards granted from the new share plans in the year are subject to performance conditions set by the Committee that are appropriate to the strategic objectives of the business, are considered to be challenging and in line with best practice/investor guidelines and are measured over three years. For the conditional share awards granted under the LTIP in March 2017 and for share options granted from the new share option plans, the performance conditions are based on the Company’s total shareholder return (“TSR”) performance relative to the performance achieved by a group of comparable companies in the same sector (the “Comparator Group”). The performance conditions are assessed over the period of three years commencing on the date of grant, at the end of which each company in the Comparator Group will be ranked in order of TSR performance. Vesting will then take place as follows. Ranking of the Company against the Comparator Group Below median Median Upper quartile or above Between median and upper quartile % of Shares comprised in conditional share award or share option that vest 0% 25% 100% 25% – 100% on a straight line basis The performance condition is measured in three tranches such that one third of the Ordinary Shares over which the conditional share awards and share options subsist will vest based on performance over the three years ending on 30 June 2017, one third based on performance over the three years ending 30 June 2018 and the final third based on performance over the three years to 30 June 2019 – an aggregate five year period. Any tranche (or part thereof) that does not meet the performance criteria will lapse and not be re-tested in later years. However, notwithstanding the TSR ranking achieved by the Company, no part of a share plan award subject to the above conditions will vest unless the Committee is satisfied that there has been an overall satisfactory and sustained improvement in the underlying financial performance of the Company over the relevant period. If and to the extent that the performance conditions are satisfied and subject to the award holder’s continued employment within the Craneware Group throughout the period, the conditional share award will normally vest three years after the date of grant; and the share options will only become exercisable three years after the date of grant. Share options will expire, at the latest, 10 years after the date of grant. 24 Craneware plc Annual Report 2017 Remuneration Committee's Report [Cont’d.] Source of shares and dilution limits The LTIP is being operated in conjunction with an Employee Benefit Trust, The Craneware plc Employee Benefit Trust, (“EBT”) which was established during the year ended 30 June 2017. Further details regarding the EBT are contained in Note 18 to the financial statements on page 56. Conditional share awards granted under the LTIP and share options granted from the new share option plans may be satisfied either by the issue of new Ordinary Shares, the transfer of shares from treasury or the transfer of existing Ordinary Shares purchased in the market. In any ten year period, the Company may not issue (or grant rights to issue) more than 10% of the issued ordinary share capital of the Company under the LTIP and any other employee share plan adopted by the Company. For the purpose of this limit: any Shares which are purchased in the market by the EBT for the purposes of satisfying Awards will not be counted; treasury Shares will count as new issue Ordinary Shares unless institutional investors decide that they need not count; no account will be taken of any Shares where the right to acquire them was released or lapsed prior to vesting / exercise; and no account will be taken of any Shares where the right to acquire them was granted prior to the Company’s original admission to AIM in 2007. Details of all share options and conditional share awards, which have been awarded and had not lapsed or been exercised or released at 30 June 2017, are contained in Note 8 to the financial statements on pages 45 to 47. Service Contracts The executive Directors and the non-executive Directors are employed under individual employment arrangements or letters of appointment where appropriate. Details of these service contracts are set out below: K Neilson C T Preston G R Elliott R Verni C Blye R Rudish Contract Date Unexpired Term Normal Notice Period Founder 15 September 2008 10 August 2007 1 May 2009 12 November 2013 28 August 2014 Rolling Rolling 1 year 11 months Rolling Rolling Rolling 3 months* 3 months* 1 month 1 month 1 month 1 month * The notice terms for Keith Neilson and Craig Preston are normally three months, however in the event of a change of control, these notice periods are automatically extended to twelve months Directors’ Interests The Directors’ interests in the ordinary shares of the Company are set out in the Directors’ Report on page 17. Directors’ Emoluments (audited) For Directors who held office during the course of the year, emoluments1 in respect of the year ending 30 June 2017 were as follows (note: with the exception of R Verni, C Blye and R Rudish, all directors are paid in Sterling; the amounts below are translated into US Dollars at the relevant average exchange rate for period being reported): Salary/Fees ($) Benefits 2 ($) Bonus ($) Pension ($) 2017 Total ($) 2016 Total ($) Executives K Neilson C T Preston Non-Executives G R Elliott N P Heywood3 R Verni C Blye R Rudish Total 300,390 274,359 84,864 16,173 57,228 53,508 51,108 902 877 241,302 178,857 14,340 6,971 556,934 461,064 489,248 465,101 - - - - - - - - - - - 162 - - - 84,864 16,335 57,228 53,508 51,108 96,375 52,046 55,572 49,140 49,632 837,630 1,779 420,159 21,473 1,281,041 1,257,114 1. Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company held by the Directors. 2. Benefits represent payments for health insurance, death in service and disability insurance. 3. N P Heywood resigned from the Board 8th November 2016. 25 Craneware plc Annual Report 2017 Remuneration Committee's Report [Cont’d.] The following Directors were paid in Sterling: Executives K Neilson C T Preston Non-Executives G R Elliott N P Heywood Total Salary/Fees (£) Benefits (£) Bonus (£) Pension (£) 2017 Total (£) 2016 Total (£) 236,751 216,235 66,885 12,746 532,617 711 691 190,181 140,966 11,302 5,494 438,945 363,386 329,786 313,509 - - - - - 127 66,885 12,873 64,956 35,078 1,402 331,147 16,923 882,089 743,329 In addition, as detailed in section (i) of this report, the following one-time, non-pensionable, Benchmark Adjustment payments were made in relating to prior years compensation. Executives K Neilson C T Preston Total 2017 $ 2016 $ 2017 £ 2016 £ 351,343 72,886 424,229 - - - 276,910 57,445 334,355 - - - Total Shareholder Return Performance Graph The following graph charts the cumulative shareholder return of the Company over the past three years, compared to the FTSE AIM all share Index and the FTSE techMARK Focus Index. The FTSE AIM all share index provides a comparison to a broad equity market index (of which Craneware is a constituent company). The FTSE techMARK Focus Index is selected because the constituents of this index are affected by similar economic and commercial factors to Craneware. 26 Craneware plc Annual Report 2017 Remuneration Committee's Report [Cont’d.] Directors’ interests in share options and LTIP awards Directors’ interests in share options as at 30 June 2017, in respect of Ordinary Shares of 1p each in Craneware plc, were for the following Directors who held office during the course of the year: Exercise Price (cents) Exercise Price (pence) Held At 30/06/16 Granted During Year Exercised During Year Lapsed During Year Held At 30/06/17 Exercisable from date Expiry date K Neilson Share Option Plan 2007 Grant Date 23 Dec 2009 6 Sep 2010 21 Sep 2012 10 Sep 2013 22 Sep 2014 9 Mar 2016 12 Sep 2016 C T Preston Share Option Plan 2007 Grant Date 15 Sep 2008 23 Dec 2009 6 Sep 2010 21 Sep 2012 10 Sep 2013 22 Sep 2014 9 Mar 2016 Schedule 4 Option Plan 534.0 618.0 650.0 621.0 839.0 1066.0 1563.0 365.0 534.0 618.0 650.0 621.0 839.0 1066.0 335.0 401.0 400.0 395.0 523.0 750.0 28,580 13,383 17,438 34,472 39,090 28,628 - - - - - - 1177.5 - 36,469 208.0 335.0 401.0 400.0 395.0 523.0 750.0 72,115 25,099 11,721 16,027 32,459 36,808 26,925 - - - - - - - 24 Mar 2017 1544.0 1237.5 Unapproved Option Plan 24 Mar 2017 1544.0 1237.5 - - 2,424 6,162 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 28,580 13,383 17,438 34,472 39,090 28,628 36,469 72,115 25,099 11,721 16,027 32,459 36,808 26,925 23 Dec 12 23 Dec 19 6 Sep 13 6 Sep 20 21 Sep 15 21 Sep 22 10 Sep 16 10 Sep 23 22 Sep 17 22 Sep 24 1/3rd vested 9 Mar 26 Not yet vested 12 Sep 26 15 Sep 11 15 Sep 18 23 Dec 12 23 Dec 19 6 Sep 13 6 Sep 20 21 Sep 15 21 Sep 22 10 Sep 16 10 Sep 23 22 Sep 17 22 Sep 24 1/3rd vested 9 Mar 26 2,424 Not yet vested 24 Mar 27 6,162 Not yet vested 24 Mar 27 Information regarding total share options, as granted to Directors and other employees, which were in existence during the year is contained in Note 8 to the financial statements on pages 45 to 47. The maximum number of Ordinary Shares subject to conditional share awards granted to Directors under the LTIP as at 30 June 2017 were as follows, in respect of Directors who held office during the course of the year: Grant date Held At 30/06/16 Granted During Year Exercised During Year Lapsed During Year Held At 30/06/17 Share price at date of grant (pence) Vesting date C T Preston Conditional share award 24 Mar 2017 - 8,586 - - 8,586 1,237.5 24 Mar 2020 There was no consideration for the grant of the conditional award and no consideration will be payable by the award holder to receive the Shares from this award, if and to the extent that it vests. The entitlement to shares under the LTIP is subject to achieving the performance conditions referred to on page 24. The table above shows the maximum entitlement and the actual number of shares (if any) that vest from the award will depend on those conditions being achieved. On behalf of the Remuneration Committee: Ronald Verni Chairman of the Remuneration Committee 4 September 2017 27 Craneware plc Annual Report 2017 Independent Auditors’ Report to the Members of Craneware plc Report on the audit of the financial statements Opinion In our opinion, Craneware plc’s group financial statements and company financial statements (the “financial statements”): give a true and fair view of the state of the group’s and of the company’s affairs as at 30 June 2017 and of the group’s profit and the group’s and the company’s cash flows for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and company balance sheets as at 30 June 2017; the consolidated statement of comprehensive income, the group and company statements of cash flows, and the group and company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview Materiality Group financial statements: $842,500 (2016: $705,000), based on 5% of Group profit before taxation. Company financial statements: $747,690 (2016: $700,000), based on 5% of Company profit before taxation. Audit Scope We performed an audit of the complete financial information of Craneware plc and Craneware, Inc. We also audited material balances in Craneware Insight, Inc and Craneware Healthcare Intelligence LLC. Taken together, the entities audited comprised 100% of Group revenues. All audit work was performed by one team in the UK. Key Audit Matters Revenue and deferred income (Group and Company). Provision of income tax (Group and Company). Internally developed intangible assets (Group and Company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. 28 Craneware plc Annual Report 2017 Independent Auditors’ Report to the Members of Craneware plc [Cont’d.] Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter Revenue and deferred income (Group and Company) (Refer to page 38 (Principal accounting policies)). The Group has revenue of $57,796k (2016: $49,846k) and deferred income of $29,803k (2016: $28,963k). The Company has revenue of $53,848k (2016: $45,022k) and deferred income of $29,797k (2016 $27,870k). These amounts are significant in the context of the Group statement of comprehensive income and the Group and Company balance sheets. The amount of revenue to be recognised and the amount to be deferred is calculated manually in a spreadsheet. There is a risk that revenue and deferred income are not recognised appropriately or within the correct period. Provision for income tax (Group and Company) (Refer to page 40 (Principal accounting policies) and page 41 (Critical accounting estimates and judgements)). The Group has cross border activities and is subject to tax in the UK and the US. The Directors must regularly assess the applicability of the transfer pricing policy being applied to revenue transaction between Craneware Plc and Craneware Inc. We focus on this area as there is judgement involved in the creation of the policy. If the policy were to be challenged by either the UK or US tax authorities it could lead to a material difference in the current tax charge. Internally developed intangible assets (Group and Company) (Refer to page 39 (Principal accounting policies) and page 41 (Critical accounting estimates and judgements)). The Group has $6,191k (2016: $2,829k) and the Company has $5,844k (2016: $2,460k) of Development costs capitalised on the balance sheet. The Group capitalises development costs when the following criteria have been met: new product development costs are technically feasible; production and sale is intended; a market exists; expenditure can be measured reliably; and sufficient resources are available to complete such projects. The Directors are required to continually assess the commercial potential of each product in development in order to determine if costs can continue to be capitalised. We focus on this area as there is judgement involved in the Directors' assessment. How we tailored the audit scope How our audit addressed the key audit matter For a sample of revenue transactions we agreed the key inputs for revenue recognition to contracts, and agreed to invoices and cash receipts. For each transaction tested we recalculated the revenue recognised in the current year and agreed amounts recognised as deferred income in order to conclude that the correct amount of revenue had been recognised and in the correct period. A sample of revenue transactions recorded post year end were assessed to conclude that they should not have been recorded in an earlier period. No matters arose during our testing. We obtained and assessed the transfer pricing policy that management has in place. We reviewed the transfer pricing adjustments to confirm they were made in line with the policy. On a sample basis we agreed additions to intangible assets to supporting documentation, including invoices and time records. The nature of the costs being capitalised was assessed to ensure it met the accounting requirements to capitalise. Discussions were held with management in order to understand how all criteria for capitalisation had been met and supporting evidence was obtained to corroborate this. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. The group is comprised of five entities. We performed an audit of the complete financial information of Craneware plc and Craneware, Inc due to their financial significance within the group. We also audited material balances in Craneware Insight, Inc and Craneware Healthcare Intelligence LLC. Taken together, the entities where we performed our audit work accounted for 100% of Group revenues. All audit work was undertaken by a single engagement team at the Group's head office. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in 29 Craneware plc Annual Report 2017 Independent Auditors’ Report to the Members of Craneware plc [Cont’d.] evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality $842,500 (2016: $705,000). $747,690 (2016: $700,000). How we determined it 5% of profit before taxation. 5% of profit before taxation. Rationale for benchmark applied Consistent with last year, we have applied this benchmark, a generally accepted auditing practice. We also believe the measure of profit before tax is the measure most commonly used by the shareholders to measure the performance of the Group. We have applied this benchmark, a generally accepted auditing practice. We also believe the measure of profit before tax is the measure most commonly used by the shareholders to measure the performance of the Company. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between $550,000 and $812,000. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $42,125 (Group audit) (2016: $35,250) and $37,400 (Company audit) (2016: $35,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s and company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 30 June 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. 30 Craneware plc Annual Report 2017 Independent Auditors’ Report to the Members of Craneware plc [Cont’d.] Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on page 18, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or certain disclosures of directors’ remuneration specified by law are not made; or the parent company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Kenneth Wilson Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 4 September 2017 Notes: (a) The maintenance and integrity of the Craneware plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 31 Craneware plc Annual Report 2017 Consolidated Statement of Comprehensive Income for the year ended 30 June 2017 Continuing operations: Revenue Cost of sales Gross profit Operating expenses Operating profit Analysed as: Adjusted EBITDA1 Acquisition costs and share related transactions Share based payments Depreciation of plant and equipment Contingent consideration on business combination Amortisation and impairment of intangible assets Finance income Profit before taxation Tax on profit on ordinary activities Profit for the year attributable to owners of the parent Other comprehensive income Items that may be reclassified subsequently to profit or loss Currency Translation Reserve movement Total items that may be reclassified subsequently to profit or loss Total comprehensive income attributable to owners of the parent Notes 4 5 6 8 13 14 9 10 Total 2017 $’000 57,796 (3,582) 54,214 Total 2016 $’000 49,846 (3,011) 46,835 (37,588) (33,024) 16,626 13,811 18,002 15,863 - (283) (478) - (556) (251) (442) 1,005 (615) (1,808) 258 16,884 (3,359) 13,525 112 13,923 (3,348) 10,575 40 40 - - 13,565 10,575 1Adjusted EBITDA is defined as operating profit before acquisition costs, share based payments, depreciation, contingent consideration, amortisation, impairment and share related transactions. The accompanying notes are an integral part of these financial statements. 32 Craneware plc Annual Report 2017 Statements of Changes in Equity for the year ended 30 June 2017 Group At 1 July 2015 Total comprehensive income - profit for the year Transactions with owners: Share-based payments Impact of share options exercised / lapsed Dividends (Note 11) At 30 June 2016 Total comprehensive income - profit for the year Total other comprehensive income Transactions with owners: Company shares acquired by employee benefit trust Share-based payments Impact of share options exercised / lapsed Dividends (Note 11) At 30 June 2017 Company At 1 July 2015 Total comprehensive income - profit for the year Transactions with owners: Share-based payments Impact of share options exercised / lapsed Dividends (Note 11) At 30 June 2016 Total comprehensive income - profit for the year Transactions with owners: Share-based payments Impact of share options exercised / lapsed Dividends (Note 11) At 30 June 2017 Share Capital $’000 Share Premium Account $’000 536 17,356 - - - - - - 95 - 536 17,451 - - - - 1 - - - - - 523 - 537 17,974 536 17,356 - - - - - - 95 - 536 17,451 - - 1 - - - 523 - 537 17,974 Other Reserves $’000 378 - 251 (74) - 555 - - - 519 (116) - 958 285 - 141 (45) - 381 - 159 (36) - 504 Retained Earnings $’000 29,360 10,575 210 74 (5,953) 34,266 13,525 40 Total Equity $’000 47,630 10,575 461 95 (5,953) 52,808 13,525 40 (3,083) (3,083) 1,078 416 (6,356) 39,886 24,161 8,773 - 138 (5,953) 27,119 12,052 627 98 (6,356) 33,540 1,597 824 (6,356) 59,355 42,338 8,773 141 188 (5,953) 45,487 12,052 786 586 (6,356) 52,555 Other reserves relate to share-based payments and are detailed in Note 1 and these reserves are not available for distribution. The accompanying notes are an integral part of these financial statements. 33 Craneware plc Annual Report 2017 Consolidated Balance Sheet as at 30 June 2017 ASSETS Non-Current Assets Plant and equipment Intangible assets Trade and other receivables Deferred tax Current Assets Trade and other receivables Cash and cash equivalents Total Assets EQUITY & LIABILITIES Non-Current Liabilities Deferred income Current Liabilities Deferred income Current tax liabilities Trade and other payables Total Liabilities Equity Share capital Share premium account Other reserves Retained earnings Total Equity Total Equity and Liabilities Registered Number SC196331 Notes 2017 $’000 2016 $’000 13 14 16 17 16 20 21 18 1,375 19,845 4,278 3,102 28,600 15,381 53,170 68,551 97,151 - - 29,803 198 7,795 37,796 37,796 537 17,974 958 39,886 59,355 97,151 1,213 16,535 4,581 1,685 24,014 20,953 48,812 69,765 93,779 4 4 28,963 2,353 9,651 40,967 40,971 536 17,451 555 34,266 52,808 93,779 The accompanying notes are an integral part of these financial statements. The financial statements on pages 32 to 59 were approved and authorised for issue by the Board of Directors on 4 September 2017 and signed on its behalf by: Keith Neilson Director Craig Preston Director 34 Craneware plc Annual Report 2017 Company Balance Sheet as at 30 June 2017 ASSETS Non-Current Assets Investment in subsidiary undertakings Plant and equipment Intangible assets Deferred Tax Amounts owed from group companies Current Assets Trade and other receivables Cash and cash equivalents Total Assets EQUITY & LIABILITIES Non-Current Liabilities Deferred income Current Liabilities Deferred income Current tax liabilities Trade and other payables Total Liabilities Equity Share capital Share premium account Other reserves Retained earnings At 1 July Profit for the year attributable to owners Other changes in retained earnings Total Equity Total Equity and Liabilities Notes 2017 $’000 2016 $’000 15 13 14 17 16 16 20 21 18 10,107 826 6,240 980 6,000 24,153 15,468 49,819 65,287 89,440 - - 29,797 1,539 5,549 36,885 36,885 537 17,974 504 33,540 27,119 12,052 (5,631) 52,555 89,440 10,107 838 2,603 405 6,000 19,953 16,573 45,324 61,897 81,850 4 4 27,870 1,019 7,470 36,359 36,363 536 17,451 381 27,119 24,161 8,773 (5,815) 45,487 81,850 Registered Number SC196331 The accompanying notes are an integral part of these financial statements. The financial statements on pages 32 to 59 were approved and authorised for issue by the Board of Directors on 4 September 2017 and signed on its behalf by: Keith Neilson Director Craig Preston Director 35 Craneware plc Annual Report 2017 Statements of Cash Flows for the year ended 30 June 2017 Cash flows from operating activities Cash generated from operations Interest received Tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of plant and equipment Capitalised intangible assets Net cash used in investing activities Cash flows from financing activities Dividends paid to company shareholders Proceeds from issuance of shares Company shares acquired by employee benefit trust Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year The accompanying notes are an integral part of these financial statements. Group Company 2017 $’000 2016 $’000 2017 $’000 2016 $’000 23,068 258 (5,474) 17,852 (654) (3,925) (4,579) (6,356) 524 (3,083) (8,915) 4,358 48,812 53,170 17,564 112 (2,254) 15,422 (418) (2,166) (2,584) (5,953) 95 - (5,858) 6,980 41,832 48,812 19,378 420 (2,271) 17,527 (251) (3,866) (4,117) (6,356) 524 (3,083) (8,915) 4,495 45,324 49,819 14,944 245 (1,913) 13,276 (230) (1,796) (2,026) (5,953) 95 - (5,858) 5,392 39,932 45,324 Notes 19 13 14 11 20 36 Craneware plc Annual Report 2017 Notes to the Financial Statements General Information Craneware plc (the Company) is a public limited company incorporated and domiciled in Scotland. The Company has a primary listing on the AIM stock exchange. The address of its registered office and principal place of business is disclosed on page 13 of the financial statements. The principal activity of the Company is described in the Directors’ Report. Basis of preparation The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, International Financial Reporting Standards Interpretation Committee (IFRS IC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historic cost convention and prepared on a going concern basis. The applicable accounting policies are set out below, together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year, if relevant. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The Company and its subsidiary undertakings are referred to in this report as the Group. 1 Principal accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied, unless otherwise stated. Reporting currency The Directors consider that as the Group’s revenues are primarily denominated in US dollars the Company’s principal functional currency is the US dollar. The Group’s financial statements are therefore prepared in US dollars. Currency translation Transactions denominated in currencies other than US dollars are translated into US dollars at the rate of exchange ruling at the date of the transaction. The average exchange rate during the course of the year was $1.2688/£1 (2016: $1.4837/£1). Monetary assets and liabilities expressed in foreign currencies are translated into US dollars at rates of exchange ruling at the Balance Sheet date $1.30197/£1 (2016: $1.3397/£1). Exchange gains or losses arising upon subsequent settlement of the transactions and from translation at the Balance Sheet date, are included within the related category of expense where separately identifiable, or administrative expenses. New Standards, amendments and interpretations effective in the year The Directors have adopted the following Standards, amendments and interpretations (where relevant to the Group and subject to their endorsement by the EU) and they have concluded that they have no material financial impact on the financial statements of the Group or Company. IAS 27, ‘Separate financial statements’ (effective 1 January 2016*), These amendments allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. IFRS 10, ‘Consolidated Financial Statements’ and IAS 18, ‘Investments in Associates’ on investment entities applying the consolidation exception. (effective 1 January 2016*), These amendments clarify the application of the consolidated exception for investment entities and their subsidiaries. IFRS 11, ‘Joint arrangements’ (effective 1 January 2016*), This amendment adds new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendments specify the appropriate accounting treatment for such acquisitions. Annual improvements 2014 (effective 1 January 2016*), IFRS 14, ‘Regulatory deferral accounts’ (effective 1 January 2016*), This set of annual improvements addresses issues in the 2012-2014 reporting cycle, which affects four different standards, none of which are expected to have a material impact on the Group. IAS 1, ‘Presentation of financial statements’ (effective 1 January 2016*), These amendments are as part of the IASB initiative to improve presentation and disclosure in financial reports. IAS 16, ‘Property, plant and equipment’ and IAS 38 ‘Intangible assets’ (effective 1 January 2016*), These amendments clarify that the use of revenue- based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. It has also been clarified by the IASB, that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This standard permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities which already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. New Standards, amendments and interpretations not yet effective The Directors anticipate that the future adoption of the following Standards, amendments and interpretations (where relevant to the Group and subject to their endorsement by the EU) will have no material financial impact on the financial statements of the Group and Company in their current form. None of the below Standards, amendments or interpretations have been adopted early but their potential impact is continually monitored. Annual improvements 2014-2016 (effective 1 January 2017*), 37 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 1 Principal accounting policies (cont’d.) This set of annual improvements addresses issues in the 2014-2016 reporting cycle, which affects three different standards. IFRS 2, ‘Share based payments’ (effective 1 January 2018*), IFRS 4, ‘Insurance contracts’ (effective 1 January 2018*), IFRS 9, ‘Financial instruments: classification and measurement’ (effective 1 January 2018*). IFRS 9 requires new disclosures in particular about hedge accounting, credit risk and expected credit losses; the Group plans to implement controls it believes necessary to capture the required data. IFRS 15, ‘Revenue from contracts with customers’. The Group has commenced an assessment of the potential impact on its consolidation financial statements; this assessment is not yet concluded. IFRS 16, ‘Leases’ (effective 1 January 2019*). The Group has commenced and initial assessment of the potential impact on its consolidated financial statements; this assessment is not yet concluded. IFRS 17, ‘Insurance contracts’ (effective 1 January 2021*), IFRIC 22, ‘Foreign currency transactions and advance consideration’ (effective 1 January 2018*), IAS 7, ‘Statement of Cash Flows’ (effective 1 January 2017*), IAS 12, ‘Income Taxes’ (effective 1 January 2017*), IAS 40, ‘Investment property’ (effective 1 January 2018*), The Directors continue to assess the potential implications of IFRS 15, ‘Revenue from contracts with customers’ (effective 1 January 2018). The first year end that is expected to be affected is 30 June 2019. *effective for accounting periods starting on or after this date. Basis of consolidation The consolidated Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity and Statement of Cash flows include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control transferred to the Group and are deconsolidated from the time control ceases. Intra Group revenue and profits/(losses) are eliminated on consolidation and all sales and profit figures relate to external transactions only. As permitted by Section 408(4) of the Companies Act 2006, the Statement of Comprehensive Income of the Parent Company is not presented although the Company performance can been seen in isolation in the Statements of Changes in Equity. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the acquisition date, of assets given, liabilities incurred or assumed, and the equity issued by the Group. The consideration transferred includes the fair value of any assets or liability resulting from a contingent consideration and acquisition costs are expensed as incurred. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be a financial asset or financial liability is recognised in accordance with IAS 39 in the Statement of Comprehensive Income and any balances at the balance sheet date are categorised as ‘fair value through profit and loss’. Contingent consideration that is classified as equity is not re- measured and its subsequent settlement is accounted for within equity. Goodwill arising on the acquisition is recognised as an asset and initially measured at cost, being the excess of fair value of the consideration over the Group’s assessment of the net fair value of the identifiable assets and liabilities recognised. If the Group’s assessment of the net fair value of a subsidiary’s assets and liabilities had exceeded the fair value of the consideration of the business combination, then the excess (‘negative goodwill’) would be recognised in the Statement of Comprehensive Income immediately. The fair value of the identifiable assets and liabilities assumed on acquisition are brought onto the Balance Sheet at their fair value at the date of acquisition. Revenue recognition The Group follows the principles of IAS 18, ‘Revenue Recognition’, in determining appropriate revenue recognition policies. In principle revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group. Revenue is derived from sales of, and distribution agreements relating to, software licenses and professional services (including installation). Revenue is recognised when (i) persuasive evidence of an arrangement exists; (ii) the customer has access and right to use our software; (iii) the sales price can be reasonably measured; and (iv) collectability is reasonably assured. ‘White-labelling’ or other ‘Paid for development work’ is generally provided on a fixed price basis and as such revenue is recognised based on the percentage completion or delivery of the relevant project. Where percentage completion is used it is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project. Where contracts underlying these projects contain material obligations, revenue is deferred and only recognised when all the obligations under the engagement have been fulfilled. Revenue from standard licensed products which are not modified to meet the specific requirements of each customer is recognised from the point at which the customer has access and right to use our software. This right to use software will be for the period covered under contract and, as a result, our annuity based revenue model recognises the licensed software revenue over the life of this contract. This policy is consistent 38 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 1 Principal accounting policies (cont’d.) with the Company’s products providing customers with a service through the delivery of, and access to, software solutions (Software-as-a-Service (“SaaS”)), and results in revenue being recognised over the period that these services are delivered to customers. Incremental costs directly attributable in securing the contract are charged equally over the life of the contract and as a consequence are matched to revenue recognised. Any deferred contract costs are included in both current and non-current trade and other receivables. Revenue from all professional services is recognised as the applicable services are provided. Where professional services engagements contain material obligations, revenue is recognised when all the obligations under the engagement have been fulfilled. Where professional services engagements are provided on a fixed price basis, revenue is recognised based on the percentage completion of the relevant engagement. Percentage completion is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project. Software and professional services sold via a distribution agreement will normally follow the above recognition policies. Should any contracts contain non-standard clauses, revenue recognition will be in accordance with the underlying contractual terms which will normally result in recognition of revenue being deferred until all material obligations are satisfied. The excess of amounts invoiced over revenue recognised are included in deferred income. If the amount of revenue recognised exceeds the amount invoiced the excess is included within accrued income. Intangible Assets (a) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is capitalised and recognised as a non-current asset in accordance with IFRS 3 and is tested for impairment annually, or on such occasions that events or changes in circumstances indicate that the value might be impaired. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. (b) Proprietary software Proprietary software acquired in a business combination is recognised at fair value at the acquisition date. Proprietary software has a finite life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the associated costs over their estimated useful lives of five years. (c) Contractual customer relationships Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relations have a finite useful economic life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship which has been assessed as ten years. (d) Research and Development expenditure Expenditure associated with developing and maintaining the Group’s software products is recognised as incurred. Where, however, new product development projects are technically feasible, production and sale is intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete such projects, development expenditure is capitalised until initial commercialisation of the product, and thereafter amortised on a straight-line basis over its estimated useful life, which has been assessed as five years. Staff costs and specific third party costs involved with the development of the software are included within amounts capitalised. (e) Computer software Costs associated with acquiring computer software and licensed to-use technology are capitalised as incurred. They are amortised on a straight-line basis over their useful economic life which is typically three to five years. Impairment of non-financial assets At each reporting date the Group considers the carrying amount of its tangible and intangible assets including goodwill to determine whether there is any indication that those assets have suffered an impairment loss. If there is such an indication, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any) through determining the value in use of the cash generating unit that the asset relates to. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the impairment loss is recognised as an expense. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset. A reversal of an impairment loss is recognised as income immediately. Impairment losses relating to goodwill are not reversed. Plant and Equipment All plant and equipment are stated at historic cost less depreciation, costs include the original purchase price of the asset and the costs attributable to bring the asset to its working condition for its intended use. Depreciation is provided to write off the cost less estimated residual values of tangible fixed assets over their expected useful lives. It is calculated at the following rates: Computer equipment Tenants improvements Office furniture - Between 20% - 33% straight line - Between 10% - 20% straight line - Between 14% - 25% straight line 39 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 1 Principal accounting policies (cont’d.) Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of assets are included in operating profit. Repairs and maintenance are charged to the Statement of Comprehensive Income during the financial year in which they are incurred. The cost of major renovations is included in the carrying amount of the assets when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Taxation The charge for taxation is based on the profit for the period as adjusted for items which are non-assessable or disallowable. It is calculated using taxation rates that have been enacted or substantively enacted by the Balance Sheet date. Deferred taxation is computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset. In the UK and the US, the Group is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options and on the vesting of conditional share awards under each jurisdiction’s tax rules. As explained under “Share based payments”, a compensation expense is recorded in the Group’s Statement of Comprehensive Income over the period from the grant date to the vesting date of the relevant options and conditional share awards. As there is a temporary difference between the accounting and tax bases a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the Balance Sheet date) with the cumulative amount of the compensation expense recorded in the Statement of Comprehensive Income. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity against retained earnings. Investment in subsidiaries Investment in Group undertakings is recorded at cost, which is the fair value of the consideration paid, less any provision for impairment. Kestros Ltd Kestros Ltd (SC362481), one of Craneware plc's subsidiaries is exempt from the requirement for its financial statements to be audited under the provisions of section 479 A of the Companies Act 2006. Operating leases The costs of operating leases are charged on a straight line basis over the duration of the leases in arriving at operating profit. Financial assets TThe Group classifies its financial assets in the following categories: (i) at fair value through profit and loss, (ii) loans and receivables and (iii) available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. At each Balance Sheet date included in the financial information, the Group held only items classified as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the Balance Sheet date. These are classified as non-current assets. Loans and receivables are classified as ‘trade and other receivables’ or ‘cash and cash equivalents’ in the Balance Sheet. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairments. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Statement of Comprehensive Income within ‘operating expenses’. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against operating expenses in the Statement of Comprehensive Income. Financial liabilities Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Cash and cash equivalents For the purpose of the Statements of Cash flows, cash and cash equivalents comprise cash on hand, deposits held with banks and short term highly liquid investments. 40 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 2 Critical accounting estimates and judgements The preparation of financial statements in accordance with IFRS requires the Directors to make critical accounting estimates and judgements that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are discussed below: Impairment assessment:- the Group tests annually whether Goodwill has suffered any impairment and for other assets including acquired intangibles at any point where there are indications of impairment. This requires an estimation of the recoverable amount of the applicable cash generating unit to which the Goodwill and other assets relate. Estimating the recoverable amount requires the Group to make an estimate of the expected future cash flows from the specific cash generating unit using certain key assumptions including growth rates and a discount rate. Reasonable changes to these assumptions such as increasing the discount rate by 5% (18% to 23%) and decreasing the long-term growth rate applied to revenues by 1% (2% to 1%) would still result in no impairment in goodwill. Provisions for income taxes:- the Group is subject to tax in the UK and US and this requires the Directors to regularly assess the applicability of its transfer pricing policy. Capitalisation of development expenditure:- the Group capitalises development costs provided the aforementioned conditions have been met. Consequently, the Directors require to continually assess the commercial potential of each product in development and its useful life following launch. Employee benefits The Group operates a defined contribution Stakeholder Pension Scheme as described in Section 3 of Welfare Reform and Pensions Act 1999. Private medical insurance is also offered to every employee. Amounts payable in respect of these benefits are charged to the Statement of Comprehensive Income as they fall due. The Group has no further payment obligations once the payments have been made. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Share-based payments The Group grants share options and / or conditional share awards to certain employees. In accordance with IFRS 2, “Share Based Payments”, equity-settled share based payments are measured at fair value at the date of grant. Fair value is measured using the Black-Scholes pricing model or the Monte Carlo pricing model, as appropriately amended, taking into account the terms and conditions of the share based awards. The fair value determined at the date of grant of the equity-settled share based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of shares that will eventually vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the Statement of Comprehensive Income, with a corresponding adjustment to equity. When the options are exercised and are satisfied by new issued shares, the proceeds received net of any directly attributable transaction costs are credited to share capital and share premium. The share based payments charge is included in ‘operating expenses’ with a corresponding increase in ‘Other reserves’. Share capital Ordinary shares are classified as equity. Dividends Dividends are recorded in the financial statements in the year in which they are approved by the shareholders. Interim dividends are recognised as a distribution when paid. 3 Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (primarily currency risk and cash flow interest rate risk), credit risk, counterparty risk and liquidity risk. Risk management is carried out under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises when commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. The Group operates primarily in the US however a significant proportion of costs are incurred in Sterling. Management are therefore required to continually assess the Group’s foreign exchange risk against the Group’s functional currency, and whether any form of hedge should be entered into. A cash flow hedge arrangement, comprising forward exchange contracts in respect of highly probable forecast transactions was utilised during the year. These contracts were concluded in the year with none outstanding at the year-end. The Board continues to assess the appropriateness of the Group’s hedging policy. The Directors believe that a 10% change in the value of Sterling relative to the US dollar would impact post-tax profits and equity between approximately $1,380,000 and $1,260,000 (dependent on whether lower or higher) as a result of foreign exchange gains/ losses on Sterling denominated transactions and the translation of Sterling denominated current liabilities. The Directors believe that 10% is appropriate for the sensitivity analysis based on recent movements in the exchange rates. (ii) Cash flow and interest rate risk The Group has no significant interest-bearing assets or liabilities, other than cash held on deposit at variable rates. The Directors believe that a 25 basis point move in interest rates would, with all other variables held constant, alter post-tax profit and equity for the year in the region of $119,000 higher/lower respectively. The Directors believe that 25 basis points is appropriate for the sensitivity analysis based on recent market conditions. 41 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 3 Financial risk management (cont’d.) (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and trade receivables. In order to minimise the Group’s exposure to risk, all cash deposits are placed with reputable banks and financial institutions. The Group’s exposure to trade receivables is reduced due to contractual terms which require installation, training, annual licensing and support fees, to be invoiced annually in advance. (c) Counterparty risk The Group has significant cash and cash equivalent balances and in order to mitigate the risk of failing institutions management has treasury deposits spread across a range of reputable banks, the details of which are disclosed on page 13. (d) Liquidity risk Management reviews the liquidity position of the Group to ensure that sufficient cash is available to meet the underlying needs of the Group as they fall due for payment. The table below analyses the Group’s financial liabilities which will be settled on a net basis into relevant maturity grouping based on the remaining period from the Balance Sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 1 year $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 At 30 June 2016 Trade and Other Payables 9,155 At 30 June 2017 Trade and Other Payables 7,741 - - - - - - Total $’000 9,155 7,741 There is no difference between the undiscounted liabilities and the amounts shown in Note 21 as the Group’s financial liabilities are all short term in nature. Capital risk management The Group is cash generative and trading is funded internally. As a result, management do not consider capital risk to be significant for the Group. Contracts are normally billed annually in advance. Assuming timely receivables collection, the Group will have favourable movements from working capital by generating cash ahead of revenue recognition. Consequently, funds are retained in the business to finance future growth, either organically or by acquisition. 4 Revenue The chief operating decision maker has been identified as the Board of Directors. The Group revenue is derived almost entirely from the sale of software licenses, white labelling and professional services (including installation) to hospitals within the United States of America. Consequently, the Board has determined that Group supplies only one geographical market place and as such revenue is presented in line with management information without the need for additional segmental analysis. All of the Group assets are located in the United States of America with the exception of the Parent Company’s, the net assets of which are disclosed separately on the Company Balance Sheet and are located in the UK. 2017 $’000 49,556 8,240 57,796 2016 $’000 43,170 6,676 49,846 Software licensing Professional services Total revenue 42 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 5 Operating expenses Operating expenses comprise the following: Sales and marketing expenses Client servicing Research and development Administrative expenses Acquisition Costs Share based payments (Note 8) Depreciation of plant and equipment (Note 13) Contingent consideration of business combination Amortisation and Impairment of intangible assets (Note 14) Exchange (gain)/loss Operating expenses 6 Operating profit The following items have been included in arriving at operating profit: Staff costs (Note 7) Depreciation of plant and equipment (Note 13) Amortisation of intangible assets (Note 14) Impairment of intangible assets (Note 14) Impairment of trade receivables Operating lease rents for premises Services provided by the Group’s auditors During the year the Group obtained the following services from the Group’s auditors as detailed below: Statutory audit - Parent Company financial statements and consolidation Tax compliance and other tax services 2017 $’000 7,326 10,688 9,108 9,216 - 283 478 - 615 (126) 2016 $’000 7,634 9,285 7,668 6,340 556 251 442 (1,005) 1,808 45 37,588 33,024 2017 $’000 26,861 478 615 - 653 1,173 2017 $’000 75 135 210 2016 $’000 22,329 442 803 1,005 381 974 2016 $’000 67 113 180 43 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 7 Staff costs The average number of persons employed by the Group during the year, excluding non-executive Directors, is analysed below: Sales and distribution Client servicing Research and development Administration Employment costs of all employees excluding non-executive Directors: Wages and salaries Social security costs Pension costs - defined contribution plans Share based payments Total direct costs of employment Highest paid director: Salary and short-term employee benefits Pension costs - defined contribution plans Share-based payments 2017 Group Number 2016 Group Number 2017 Company Number 2016 Company Number 32 89 112 30 263 2017 Group $’000 24,311 1,954 313 283 26,861 32 78 92 28 230 2016 Group $’000 20,254 1,748 76 251 22,329 - 31 73 21 125 1 30 63 21 115 2017 Company $’000 2016 Company $’000 11,133 1,027 210 158 12,528 2017 $’000 894 14 32 940 8,283 715 87 141 9,226 2016 $’000 479 11 33 523 The highest paid Director did not exercise any shares during the year (2016: Nil). Directors’ emoluments are detailed in the Remuneration Committee’s Report on page 25 and key management compensation is given in the Related Party Transaction note on page 58 . Retirement benefits are accruing for two of the executive Directors under a defined contribution scheme (2016: three). 44 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 8 Share-based payments During the year the Group operated four equity-settled share based payment plans whereby options over, or conditional awards of, Ordinary Shares in Craneware plc can be granted to employees and executive Directors. Directors’ interests in share plan awards are set out in the Remuneration Committee’s Report on page 27. The fair value of the share based awards is recognised as an expense, with a corresponding increase in equity, during the vesting period. A total share based payments expense of $283,446 (2016: $250,669) was recognised in the Statement of Comprehensive Income for the year, as stated in Note 7 above, which comprises: Type of award and name of share plan Share options granted under the 2007 Share Option Plan Share options granted under the 2016 Unapproved Share Option Plan Share options granted under the 2016 Schedule 4 Share Option Plan Conditional share awards granted under the LTIP Total share based payments charge 2017 $’000 2016 $’000 237 15 6 25 283 251 - - - 251 Share option plans Share options, granted by the Company to employees in respect of the following number of Ordinary Shares, were outstanding at 30 June 2017. Date of grant Exercise price (GBP) Exercise price (USD) Remaining life at 1 July 2016 (years) No. of options at 1 July 2016 Granted Exercised Lapsed No. of options at 30 June 2017 Remaining life at 30 June 2017 (years) 2007 Share Option Plan 15 Sep 2008 22 Dec 2009 06 Sep 2010 04 Sep 2012 21 Sep 2012 28 Jun 2013 10 Sep 2013 22 Sep 2014 09 Mar 2016 01 Apr 2016 £2.08 £3.35 £4.01 £3.60 £4.00 £3.43 £3.95 £5.225 £7.50 £7.50 $3.65 $5.34 $6.18 $5.72 $6.50 $5.20 $6.21 $8.39 $10.66 $10.72 12 Sep 2016 £11.775 $15.63 2016 Unapproved Option Plan 24 Mar 2017 2016 Schedule 4 Option Plan £12.375 $15.44 24 Mar 2017 £12.375 $15.44 2.2 3.5 4.2 6.2 6.2 7 7.2 8.2 9.7 9.8 - - - 72,115 86,034 43,835 33,465 40,534 32,051 172,479 274,061 254,652 10,000 - - - - - - - - - - - (6,865) (1,330) (19,630) - (32,051) (51,585) - - - - - - - - - - (4,700) (14,025) - - - - 41,263 67,173 25,856 - - - - - - 72,115 79,169 42,505 13,835 40,534 - 120,894 269,361 240,627 10,000 41,263 67,173 25,856 1,019,226 134,292 (111,461) (18,725) 1,023,332 1.2 2.5 3.2 5.2 5.2 - 6.2 7.2 8.7 8.8 9.2 9.7 9.7 45 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 8 Share-based payments (cont’d.) The weighted average share price at the date of exercise of share options in the year ended 30 June 2017 was £11.96 ($15.17) (2016: £7.52 ($11.16)). The market value of Craneware plc Ordinary Shares at 30 June 2017 was £12.825 ($16.70) per share. The weighted average remaining contractual life of the options outstanding at 30 June 2017 is 6.7 years (2016: 7.2 years). Balance outstanding at beginning of the year Share options granted during the year Exercised during the year Lapsed during the year Balance outstanding at end of the year Exercisable at end of the year 2017 2016 Number of Options Weighted average exercise price (£) Number of Options Weighted average exercise price (£) 1,019,226 134,292 (111,461) (18,725) 1,023,332 369,051 5.01 12.19 3.70 6.93 6.06 3.45 801,151 267,457 (17,666) (31,716) 1,019,226 201,984 4.16 7.50 3.70 5.24 5.01 3.04 The Craneware plc Employees’ Share Option Plan 2007 (‘the 2007 Share Option Plan’) Options over Ordinary Shares were granted under the 2007 Share Option Plan with an exercise price no less than the market value of the Ordinary Shares on the date of grant and, in the case of the Directors of the Company, were granted subject to sufficiently stretching performance conditions. These options are subject to time-based vesting and are not normally exercisable before the third anniversary of the date of grant. Such options lapse no later than the tenth anniversary of the date of grant. For share option awards granted under the 2007 Share Option Plan, fair value has been estimated on the date of grant using a Black-Scholes option pricing model, as appropriately adjusted. The Company estimates the number of options likely to vest by reference to the Group’s employee retention rate, and expenses the fair value over the relevant vesting period. A sufficiently long trading history of the Company’s own share price, dating from the IPO to date of grant, results in an actual volatility calculation for all grants from December 2010. Prior to this date, volatility had to be estimated by reference to similar companies whose shares are traded on a recognised stock exchange. The assumptions applied in the option pricing model, in respect of each option grant were as follows: Date of Grant 12-Sep-16 1-Apr-16 9-Mar-16 22-Sep-14 21-Oct-13 10-Sep-13 28-Jun-13 21-Sep-12 4-Sep-12 Options over Ordinary shares Share price at date of grant Share price at date of grant Vesting period (years) Expected volatility Risk free rate Dividend yield Exercise price Exercise price Number of employees Shares under option Fair value per option $15.63 £11.775 3.00 16% 0.15% 2.0% $15.63 £11.775 2 41,263 $1.07 $10.72 £7.50 3.00 31% 0.48% 2.0% $10.72 £7.50 1 10,000 $5.78 $10.66 £7.50 3.00 31% 0.51% 2.0% $10.66 £7.50 49 257,459 $8.39 £5.23 3.00 33% 1.33% 2.4% $8.39 £5.14 36 306,765 $1.78 $2.28 $7.55 £4.67 3.00 36% 0.90% 2.8% $7.55 £4.67 1 3,975 $1.79 $6.21 £3.95 3.00 36% 1.02% 2.8% $6.21 £3.95 26 321,855 $1.48 $5.20 £3.43 3.00 36% 0.73% 2.7% $5.20 £3.43 1 48,076 $1.23 $6.50 £4.00 3.00 37% 0.37% 2.6% $6.50 £4.00 2 100,394 $5.72 £3.60 3.00 37% 0.16% 2.5% $5.72 £3.60 28 230,034 $0.94 $0.82 As explained in the Remuneration Committee’s Report on page 24, shareholder approval was obtained at the AGM in November 2016 for the establishment of three new employee share plans (two share option plans and a long term incentive plan) which are outlined below: The Craneware plc Unapproved Company Share Option Plan (2016) The Craneware plc Schedule 4 Company Share Option Plan (2016) Share options were granted under these Plans to certain employees, senior managers and executive Directors in March 2017, as summarised in the table above. The exercise price of these share options was at the Company share price on the day before the grant date. The market-based performance conditions applicable to all of those share options granted in March 2017 are outlined in the Remuneration Committee’s Report on page 24. 46 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 8 Share-based payments (cont’d.) The fair value of the share options granted under these two Plans was estimated using a Monte Carlo pricing model, based on the following assumptions: Date of Grant Share price at date of grant Share price at date of grant Vesting period (years) Expected volatility Risk free rate Exercise price Exercise price Shares under option Fair value per option 24 Mar 2017 £12.375 $15.44 3 22% 0.23% £12.375 $15.44 93,029 $2.58 The expected volatility was determined by calculating the historic volatility of the Company's share price over the previous three years. Long Term Incentive Plan The Craneware plc Long Term Incentive Plan (2016) (the ‘LTIP’) Conditional share awards were granted under this Plan to certain senior managers and to the executive Directors in March 2017, as summarised in the table below. The market- based performance conditions, measured over three consecutive three year periods, applicable to those conditional share awards granted in March 2017, are outlined in the Remuneration Committee’s Report on page 24. Balance outstanding at 1 July 2016 Awards granted in the year (on 24 March 2017) Forfeited / lapsed during the year Balance outstanding at 30 June 2017 Number of conditional share awards - 46,770 - 46,770 The remaining contractual life of the conditional share awards outstanding at 30 June 2017 is 3.2 years. The fair values of the conditional share awards granted in 2017 were estimated using the Monte Carlo pricing model with the following main assumptions: Date of Grant Share price at date of grant Share price at date of grant Vesting period (years) Expected volatility Risk free rate Fair value per conditional share award 24 Mar 2017 £12.375 $15.44 3 22% 0.23% $6.11 Other share based payments In addition to the employee share plans detailed above, employee contingent share awards have also been granted by the Company. Contingent share awards in respect of a total of 94,560 Ordinary Shares were outstanding at 30 June 2017. There are three sets of non-market performance conditions applicable to the contingent share awards such that the vesting of each one-third amount of the award shares is assessed against one of the performance conditions. If the respective performance conditions are achieved, and subject to continuous employment within the Group throughout the period from the grant date, each one third amount of the award shares will vest on 1 July 2019 at the earliest. The fair value of the contingent share awards is based on the market value of an Ordinary Share on the date of grant. An assessment of the expected extent of vesting of the awards is made at the end of each reporting period and the share based payments expense recognised is adjusted so that over the whole vesting period the expense recognised is based on the fair value of the quantity of shares awards that actually vest. As the whole of the expense in the year ended 30 June 2017, in respect of these contingent share awards, related to employee costs incurred on the eligible development of software, these costs have been capitalised within development costs. 47 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 9 Finance income Deposit interest receivable Total interest receivable 10 Tax on profit on ordinary activities Profit on ordinary activities before tax Current tax Corporation tax on profits of the year Foreign exchange on taxation in the year Adjustments for prior years Total current tax charge Deferred tax Origination & reversal of timing differences Adjustments for prior years Change in tax rate Total deferred tax charge Tax on profit on ordinary activities 2017 $’000 258 258 2017 $’000 16,884 3,463 (65) 300 3,698 (161) (178) - (339) 3,359 2016 $’000 112 112 2016 $’000 13,923 3,344 54 (86) 3,312 27 25 (16) 36 3,348 The difference between the current tax charge on ordinary activities for the year, reported in the consolidated Statement of Comprehensive Income, and the current tax charge that would result from applying a relevant standard rate of tax to the profit on ordinary activities before tax, is explained as follows: Profit on ordinary activities at the UK tax rate 19.75% (2016: 20%) Effects of: Adjustment in respect of prior years Change in tax rate Additional US taxes on profits 39% (2016: 39%) Foreign Exchange Expenses not deductible for tax purposes Deduction on share plan charges Total tax charge 3,335 2,785 122 - 209 (65) (16) (226) 3,359 (61) (16) 559 54 27 - 3,348 48 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 11 Dividends The dividends paid during the year were as follows:- Final dividend, re 30 June 2016 - 12.1 cents (9 pence)/share Interim dividend, re 30 June 2017 - 10.83 cents (8.7 pence)/share Total dividends paid to Company shareholders in the year 2017 $’000 3,246 3,110 6,356 2016 $’000 3,097 2,856 5,953 The proposed final dividend for 30 June 2017 is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 12 Earnings per share a) Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year. Profit attributable to equity holders of the Company ($'000) Weighted average number of Ordinary shares in issue (thousands) Basic earnings per share ($ per share) Profit attributable to equity holders of the Company ($'000) Tax adjusted acquisition costs, share related transactions and amortisation of acquired intangibles ($'000) Adjusted Profit attributable to equity holders ($'000) Weighted average number of Ordinary shares in issue (thousands) Adjusted Basic earnings per share ($ per share) 2017 13,525 26,934 0.502 13,525 329 13,854 26,934 0.514 b) Diluted For diluted earnings per share, the weighted average number of Ordinary shares calculated above is adjusted to assume conversion of all dilutive potential Ordinary shares. The Group has one category of dilutive potential Ordinary shares, being those granted to Directors and employees under the share option scheme. Profit attributable to equity holders of the Company ($'000) Weighted average number of Ordinary shares in issue (thousands) Adjustments for Share options (thousands) Weighted average number of Ordinary shares for diluted earnings per share (thousands) Diluted earnings per share ($ per share) Profit attributable to equity holders of the Company ($'000) Tax adjusted acquisition costs, share related transactions and amortisation of acquired intangibles ($'000) Adjusted Profit attributable to equity holders ($'000) Weighted average number of Ordinary shares in issue (thousands) Adjustments for Share options (thousands) Weighted average number of Ordinary shares for diluted earnings per share (thousands) Adjusted Diluted earnings per share ($ per share) 2017 13,525 26,934 590 27,524 0.491 13,525 329 13,854 26,934 590 27,524 0.503 2016 10,575 26,838 0.394 10,575 937 11,512 26,838 0.429 2016 10,575 26,838 345 27,183 0.389 10,575 937 11,512 26,838 345 27,183 0.423 49 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 13 Plant and equipment Group Cost At 1 July 2016 Additions Disposals At 30 June 2017 Accumulated depreciation At 1 July 2016 Charge for year At 30 June 2017 Net Book Value at 30 June 2017 Cost At 1 July 2015 Additions Disposals At 30 June 2016 Accumulated depreciation At 1 July 2015 Charge for year Depreciation on disposal At 30 June 2016 Net Book Value at 30 June 2016 Company Cost At 1 July 2016 Additions At 30 June 2017 Accumulated depreciation At 1 July 2016 Charge for year At 30 June 2017 Net Book Value at 30 June 2017 Cost At 1 July 2015 Additions At 30 June 2016 Accumulated depreciation At 1 July 2015 Charge for year At 30 June 2016 Net Book Value at 30 June 2016 50 Computer Equipment $’000 Office Furniture $’000 Tenants Improvements $’000 2,281 383 (3) 2,661 1,779 281 2,060 601 2,148 391 (258) 2,281 1,812 225 (258) 1,779 502 1,045 56 (9) 1,092 920 65 985 107 1,066 15 (36) 1,045 875 76 (31) 920 125 1,643 215 (2) 1,856 1,057 132 1,189 667 1,735 15 (107) 1,643 1,020 141 (104) 1,057 586 Computer Equipment $’000 Office Furniture $’000 Tenants Improvements $’000 1,125 89 1,214 868 128 996 218 925 200 1,125 757 111 868 257 644 41 685 624 14 638 47 629 15 644 621 3 624 20 1,529 121 1,650 968 121 1,089 561 1,514 15 1,529 848 120 968 561 Total $’000 4,969 654 (14) 5,609 3,756 478 4,234 1,375 4,949 421 (401) 4,969 3,707 442 (393) 3,756 1,213 Total $’000 3,298 251 3,549 2,460 263 2,723 826 3,068 230 3,298 2,226 234 2,460 838 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 14 Intangible assets Goodwill and Other Intangible assets Group Cost At 1 July 2016 Additions At 30 June 2017 Accumulated amortisation At 1 July 2016 Charge for the year At 30 June 2017 Cost At 1 July 2015 Additions Disposals At 30 June 2016 Accumulated amortisation At 1 July 2015 Charge for the year Impairment of acquisition Amortisation on disposal At 30 June 2016 Net Book Value at 30 June 2017 11,188 Goodwill $’000 Customer Relationships $’000 Proprietary Software $’000 Development Costs $’000 Computer Software $’000 11,438 - 11,438 250 - 250 2,964 - 2,964 1,713 329 2,042 922 3,043 - 3,043 1,976 - 1,976 1,067 11,438 2,964 3,043 - - - - - - 11,438 2,964 3,043 - - 250 - 250 1,384 329 - - 1,713 1,251 1,058 163 755 - 1,976 1,067 5,755 3,482 9,237 2,926 120 3,046 6,191 3,796 1,959 - 5,755 2,759 167 - - 2,926 2,829 993 443 1,436 793 166 959 477 912 207 (126) 993 756 144 - (107) 793 200 Total $’000 24,193 3,925 28,118 7,658 615 8,273 19,845 22,153 2,166 (126) 24,193 5,957 803 1,005 (107) 7,658 16,535 Net Book Value at 30 June 2016 11,188 In accordance with the Group’s accounting policy, the carrying values of goodwill and other intangible assets are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill arose on the acquisition of Craneware InSight Inc. The carrying values are assessed for impairment purposes by calculating the value in use (net present value (NPV) of future cashflows) of the core Craneware business cash generating unit. This is the lowest level of which there are separately identifiable cash flows to assess the goodwill acquired as part of the Craneware InSight Inc purchase. The goodwill impairment review assesses whether the carrying value of goodwill is supported by the NPV of the future cashflows based on management forecasts for five years and then using an assumed sliding scale annual growth rate which is trending down to give a long-term growth rate of 2% in the residual years of the assessed period. Management have made the judgement that this long-term growth rate does not exceed the long-term average growth rate for the industry and also estimated a pre-tax discount rate of 18.5%. Sensitivity analysis was performed using a combination of different annual growth rates and a range of different weighted average cost of capital rates. Management concluded that the tempered growth rates resulting in 2% during the residual period and the pre-tax discount rate of 18% were appropriate in view of all relevant factors and reasonable scenarios and that there is currently sufficient headroom over the carrying value of the assets in the acquired business that any reasonable change to key assumptions is not believed to result in impairment. 51 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 14 Intangible assets (cont’d.) Goodwill and Other Intangible assets (Cont’d.) Company Cost At 1 July 2016 Additions At 30 June 2017 Accumulated amortisation At 1 July 2016 Charge for the year At 30 June 2017 Net Book Value at 30 June 2017 Cost At 1 July 2015 Additions At 30 June 2016 Accumulated amortisation At 1 July 2015 Charge for the year At 30 June 2016 Net Book Value at 30 June 2016 Development Costs $’000 Computer Software $’000 5,342 3,482 8,824 2,882 98 2,980 5,844 3,694 1,648 5,342 2,738 144 2,882 2,460 737 384 1,121 594 131 725 396 589 148 737 495 99 594 143 Total $’000 6,079 3,866 9,945 3,476 229 3,705 6,240 4,283 1,796 6,079 3,233 243 3,476 2,603 15 Investments in subsidiary undertakings The following information relates to all of the subsidiaries of the Group:- Name of Company Class of Shares held Proportion of Nominal Value of Issued Shares held by Craneware plc Craneware Inc Ordinary Craneware InSight Inc Ordinary Craneware Health (Kestros Ltd) Ordinary Craneware Healthcare Intelligence, LLC Ordinary 100% 100% 100% 100% Nature of Business Sales & Marketing Product Development & Professional Services Software Development Software Development Craneware Inc, Craneware InSight Inc and Craneware Healthcare Intelligence, LLC are incorporated in the United States of America and Craneware plc holds 10,000 (2016: 10,000) and 1,000 (2016: 1,000) common shares respectively with a nominal value of $0.01 each. Kestros Ltd (t/a Craneware Health) is incorporated within the United Kingdom and Craneware plc holds 1,075 (2016: 1,075) Ordinary shares respectively with a nominal value of £1 each. The results of the Subsidiary companies have been included in the consolidated financial statements Kestros Ltd Kestros Ltd (SC362481), one of Craneware plc's subsidiaries is exempt from the requirement for its financial statements to be audited under the provisions of section 479 A of the Companies Act 2006. 52 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 16 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Net trade receivables Other receivables Amounts owed from group companies Prepayments and accrued income Deferred Contract Costs Less non-current receivables Deferred Contract Costs Current portion Group Company 2017 $’000 13,102 (1,353) 11,749 144 - 1,826 5,940 19,659 - (4,278) 15,381 2016 $’000 16,504 (1,135) 15,369 1,177 - 2,950 6,038 25,534 - (4,581) 20,953 2017 $’000 12,928 (1,353) 11,575 3,218 6,000 675 - 21,468 (6,000) - 15,468 2016 $’000 15,932 (1,134) 14,798 1,162 6,000 613 - 22,573 (6,000) - 16,573 TThere is no material difference between the fair value of trade and other receivables and the book value stated above. All amounts included within trade and other receivables are classified as loans and receivables. The $6,000,000 loan due to the Company from Craneware InSight Inc. is five years in its duration from the date of issue (the acquisition date) and interest is charged quarterly in accordance with the agreement at LIBOR plus 1%. As at 30 June 2017, trade receivables of $2,501,771 (2016: $1,313,903) were past due and deemed to be impaired. The amount of the provision against these receivables was $1,270,008 as of 30 June 2017 (2016: $1,135,429). The individually impaired receivables mainly relate to customers’ financial difficulties and unresolved disputes. It was assessed a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows: Less than 30 days past due 30 – 60 days past due 61 – 90 days past due 91 + days past due 2017 $’000 48 - - 2,454 2,502 2016 $’000 - 117 187 1,010 1,314 As at 30 June 2017, trade receivables of $7,335,171 (2016: $7,921,577) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Less than 30 days past due 31 – 60 days past due 61 – 90 days past due 91 + days past due 2017 $’000 4,297 717 1,162 1,159 2016 $’000 6,279 403 527 713 7,335 7,922 As at 30 June 2017, trade receivables of $2,973,334 (2016: $7,180,798) were not past due or impaired, and the Group does not anticipate collection issues. A further $165,743 was not past due but deemed to be impaired due to a client in financial difficulty. The amount of the provision against these receivables was $82,550 as at 30 June 2017 (2016: None). 53 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 16 Trade and other receivables (cont’d.) Movement on the provision for impairment of trade receivables is as follows: At 1 July Provision for receivables impairment on revenue recognised Receivables written off during year as uncollectable Unused amounts reversed At 30 June 2017 $’000 1,135 1,038 (435) (385) 1,353 2016 $’000 779 499 (25) (118) 1,135 The creation and release of provision for impaired receivables has been included in net operating expenses in the Statement of Comprehensive Income. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. The other classes within trade and other receivables do not contain impaired assets. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. 17 Deferred taxation Deferred tax is calculated in full on the temporary differences under the liability method using a rate of tax of 19% (2016: 20%) in the UK and 39% (2016: 39%) in the US including a provision for state taxes. The movement on the deferred tax account is shown below:- At 1 July Credit/(charge) to comprehensive income Transfer direct to equity At 30 June Group Company 2017 $’00 1,685 339 1,078 3,102 2016 $’000 1,510 (36) 211 1,685 2017 $’000 405 (21) 596 980 2016 $’000 318 (6) 93 405 54 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 17 Deferred taxation (cont'd.) The movements in deferred tax assets and liabilities during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. The net deferred tax asset at 30 June 2017 was $3,101,546 (2016: $1,684,964). Losses $’000 Share Options $’000 Long-term Timing differences $’000 Accelerated tax depreciation $’000 Deferred tax assets - recognised Group At 1 July 2016 Credited to comprehensive income Credited to equity Total provided at 30 June 2017 At 1 July 2015 (Charged)/Credited to comprehensive income Credited to equity Total provided at 30 June 2016 Deferred tax liabilities - recognised Group At 1 July 2016 Credited to comprehensive income Total provided at 30 June 2017 At 1 July 2015 Credited to comprehensive income Total provided at 30 June 2016 Short term timing differences $’000 633 27 - 660 435 198 - 633 - - - - - - The analysis of the deferred tax assets and liabilities is as follows: Group Deferred tax assets: Deferred tax assets to be recovered after more than 1 year Deferred tax assets to be recovered within 1 year Deferred tax liabilities: Deferred tax liabilities to be recovered after more than 1 year Deferred tax liabilities to be recovered within 1 year Net deferred tax assets The Company's Deferred tax assets and liabilities are all expected to be recovered in the future. 817 16 - 833 1,282 (465) - 817 (562) 73 (489) (732) 170 (562) 2017 $’000 2,801 790 3,591 (341) (148) (489) 3,102 797 223 1,078 2,098 525 61 211 797 Total $’000 (562) 73 (489) (732) 170 (562) 2016 $’000 1,457 790 2,247 (341) (221) (562) 1,685 Total $’000 2,247 266 1,078 3,591 2,242 (206) 211 2,247 55 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 17 Deferred taxation (cont'd.) Deferred tax assets - recognised Company At 1 July 2016 Credited to comprehensive income Credited to equity Total provided at 30 June 2017 At 1 July 2015 Credited to comprehensive income Credited to equity Total provided at 30 June 2016 Deferred tax liabilities - recognised Company At 1 July 2016 Credited to comprehensive income Total provided at 30 June 2017 At 1 July 2015 Credited to comprehensive income Total provided at 30 June 2016 Share Options $’000 465 32 627 1,124 352 20 93 465 Accelerated tax depreciation $’000 (60) (84) (144) (34) (26) (60) Total $’000 465 32 627 1,124 352 20 93 465 Total $’000 (60) (84) (144) (34) (26) (60) The Group continues to monitor the recoverability of deferred tax assets and are satisfied that the continuing profitability will utilise the assets in respect of losses and there remains the expectation that share options will be exercised which will give rise to the utilisation of the asset in this regard. 18 Share Capital Equity share capital Ordinary shares of 1p each Allotted called-up and fully paid 2017 2016 Number $’000 Number 50,000,000 1,014 50,000,000 Equity share capital Ordinary shares of 1p each 26,961,709 537 26,850,248 2017 2016 Number $’000 Number $’000 1,014 $’000 536 The movement in share capital during the year is presented as follows: 111,461 Ordinary Shares were issued due to options that were exercised by employees in the year, as detailed in Note 8 above. The Company has granted share options and conditional share awards in respect of its Ordinary Shares and details of these are contained in Note 8. The Company established the ‘The Craneware plc Employee Benefit Trust’ (the ‘EBT’) during the financial year. This is a discretionary trust established, in conjunction with the operation of the Company’s employee share plans, for the benefit of the employees of the Company and its subsidiaries. The EBT has an independent trustee, RBC Cees Trustee Ltd. During the year ended 30 June 2017 the Company provided a loan of £2.5m ($3.1m) to the EBT which was due from the EBT to the Company at 30 June 2017. The EBT purchased 242,930 Craneware plc Ordinary Shares of 1p each in the market on 29 November 2016 at a price of 1025 pence per share and all of those Shares remained in the EBT as at 30 June 2017. The Shares held by the EBT will be utilised to satisfy employee share plan awards. 56 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 19 Cash generated from operations Reconciliation of profit before tax to net cash inflow from operating activities Profit before tax Finance income Depreciation on plant and equipment Amortisation and Impairment on intangible assets Share-based payments Movements in working capital: Decrease/(Increase) in trade and other receivables (Decrease)/Increase in trade and other payables Cash generated from operations 20 Cash and cash equivalents Cash at bank and in hand The effective rates on short term bank deposits were 0.54% (2016: 0.26%). 21 Trade and other payables Trade payables Amounts owed to group companies Social security and PAYE Other creditors Accruals Group Company 2017 $’000 16,884 (258) 478 615 283 6,146 (1,080) 23,068 2016 $’000 13,923 (112) 442 1,808 251 (8,065) 9,317 17,564 2017 $’000 14,986 (420) 269 230 158 1,962 2,193 19,378 2016 $’000 11,538 (245) 234 243 141 (3,771) 6,804 14,944 Group Company 2017 $’000 53,170 2016 $’000 48,812 2017 $’000 49,819 2016 $’000 45,324 Group Company 2017 $’000 759 - 54 47 6,935 7,795 2016 $’000 1,473 - 496 63 7,619 9,651 2017 $’000 278 2,217 234 1 2,819 5,549 2016 $’000 400 4,443 223 1 2,403 7,470 Amounts owed to Group companies are non-interest bearing and have no fixed repayment terms. Trade payables are settled in accordance with those terms and conditions agreed, generally within 30 days, provided that all trading terms and conditions on invoices have been met. The Group’s average payment period at 30 June 2017 was 18 days (2016: 19 days). Trade and other payables are classified as financial liabilities at amortised cost. 57 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 22 Contingent liabilities and financial commitments a) Capital commitments The Group has no capital commitments at 30 June 2017 (2016: $nil) b) Lease commitments The Group leases certain land and buildings. The commitments payable by the Group under these operating leases are as follows: Within one year Between 2 and 5 years More than 5 years 2017 $’000 914 3,966 1,191 6,071 2016 $’000 824 3,560 1,693 6,077 The rents payable under these leases are subject to renegotiation at various intervals specified in the leases. The Group pays all insurance, maintenance and repairs of these properties. 23 Related party transactions During the year the Group has traded in its normal course of business with shareholders and its wholly owned subsidiary in which Directors and the subsidiary have a material interest as follows:- Group Fees for services provided as non-executive Directors Fees Short-term employee benefits Executive Directors Short-term employee benefits Post employment benefits Share based payments Other key management Short-term employee benefits Post employment benefits Share based payments Subsidiary registered addresses listed on page 13. Charged $ 101,199 161,844 1,420,918 21,311 64,887 1,992,705 22,336 100,052 2017 Outstanding at year end $ - - 844,390 - - 384,388 - - 2016 Outstanding at year end $ 4,095 - 316,891 - - 380,943 - - Charged $ 154,344 148,421 940,792 13,628 64,347 1,918,469 14,075 131,269 58 Craneware plc Annual Report 2017 Notes to the Financial Statements [Cont’d.] 23 Related party transactions (cont’d.) Company Charged $ Fees for services provided as non-executive Directors Fees Short-term employee benefits Executive Directors Short-term employee benefits Post employment benefits Share-based payments Other key management Short-term employee benefits Post employment benefits Share-based payments Amounts due to Craneware Inc - Subsidiary company Sales commission Net operating expenses Balance Net Amounts due from Craneware InSight Inc - Subsidiary company Balance Net Amounts due from Craneware Health/Kestros - Subsidiary company 101,199 161,844 1,420,918 21,311 64,887 566,335 17,925 33,597 21,812,184 4,849,023 - Balance Net Amounts due to Craneware Healthcare Intelligence - Subsidiary company Balance - - - 2017 Outstanding at year end $ - - 844,390 - - 145,656 - - - - 2,800,613 7,331,174 1,080,695 1,828,578 2016 Outstanding at year end $ 4,095 - 316,891 - - 181,999 - - - - 2,530,272 3,300,809 786,442 - Charged $ 154,344 148,421 940,792 13,628 64,347 913,303 14,075 72,578 21,383,869 2,669,387 - - - - Note 18 contains details of the transactions and balances between the Company and the employee benefit trust during and at the end of the financial year. Key management are considered to be the Directors together with the Chief Intelligence Officer, Chief Technology Officer, the Chief Marketing Officer, Chief People Officer, EVP of Sales and EVP of Customer Management. There were no other related party transactions in the year which require disclosure in accordance with IAS 24. 24 Ultimate controlling party The Directors have deemed that there are no controlling parties of the Company. 59 Craneware plc Annual Report 2017 Personal Notes 60 Craneware plc Annual Report 2017 Personal Notes 61 Craneware plc Annual Report 2017 Craneware plc 1 Tanfield Edinburgh EH3 5DA Scotland, UK Telephone: +44 [0] 131 550 3100 Facsimile: +44 [0] 131 550 3101 craneware.com marketing@craneware.com training@craneware.com sales@craneware.com support@craneware.com Company Registration No. SC196331 Craneware plc
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