I n t e g r a t e d R e s e a r c h A n n u a l R e p o r t 2 0 1 8 Singapore Germany Americas ‑ East Coast Integrated Research (Singapore) Pte. Ltd. Integrated Research Germany GmbH Integrated Research, Inc. Unit 14‑03, Palais Renaissance Hamborner Str. 53 Asia Pacifi c/Middle East/Africa Integrated Research Limited Level 9, 100 Pacifi c Highway North Sydney NSW 2060 Australia T. +61 (2) 9966 1066 E. info.ap@ir.com 390 Orchard Road Singapore 238871 T. +65 6684 5856 E. info.ap@ir.com ir.com United Kingdom & Ireland Integrated Research UK Ltd The Atrium, Harefi eld Road Uxbridge, Middlesex UB8 1PH United Kingdom T. +44 (0) 189 581 7800 E. info.europe@ir.com 40472 Düsseldorf, Germany T. +49 (89) 97 007 132 E. info.germany@ir.com Americas ‑ West Coast Integrated Research, Inc. 6312 S. Fiddlers Green Circle, Suite 500N Denver, CO 80111, USA T: +1 (303) 390 8700 F: +1 (303) 390 877 E. info.usa@ir.com 12950 Worldgate Dr, Suite 720 Herndon, VA 20170, USA T: +1 (303) 390 8700 F: +1 (303) 390 8777 E. info.usa@ir.com Americas ‑ Mid West Integrated Research, Inc. 6601 Lyndale Ave. S., Suite 330 Richfi eld, Minnesota, MN 55423, USA T. +1 (612) 243 6700 F. +1 (303) 390 8777 E. info.usa@ir.com Integrated Research Annual Report 2018 ABN 76 003 588 449 Creating clarity and insight in a world of connected devices. Corporate directory Directors Steve Killelea Non‑Executive Director & Chairman John Merakovsky Managing Director and Chief Executive Offi cer Nick Abrahams Non‑Executive Director Paul Brandling Independent Non‑Executive Director and Deputy Chairman Garry Dinnie Independent Non‑Executive Director Peter Lloyd Non‑Executive Director Anne Myers Independent Non‑Executive Director Company Secretary David Purdue Registered Offi ce Level 9, 100 Pacifi c Highway North Sydney NSW 2060 T. +61 (2) 9966 1066 Share Registry Computershare Solicitors Ashurst Level 11, 5 Martin Place Sydney NSW 2000 Bankers National Australia Bank Westpac Banking Corporation Securities Exchange Listing Australian Securities Exchange Code: IRI Country of Incorporation Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Notice of Annual General Meeting The Annual General Meeting of Integrated Research Limited will be held on: Thursday 15 November 2018 Museum of Sydney Cnr. Phillip & Bridge Streets, Sydney at 3:00pm This Annual Report is printed on Impress DM Matt. Impress DM is a FSC Certifi ed paper which is made from elemental chlorine free pulp derived from well‑managed forests. It is manufactured by an EMAS and ISO 14001 certifi ed mill. 4914 Designed and Produced by RDA Creative www.rda.com.au Contents CEO’s report Chairman’s letter Financial highlights 2 4 6 9 10 2018 in IR 13 Directors’ report 27 Remuneration report (audited) About IR 37 Corporate governance 45 Financials 79 Directors’ declaration 80 Independent auditor’s report 87 ASX additional information 89 Corporate directory 1 Integrated Research and its controlled entities Annual Report 2018 Achievements APAC: Revenue 14% 13.2M 30 years in business Strong growth from Service Providers New reseller agreements with Cisco & Avaya Consulting 9% Financial highlights Total revenue (AUD millions) Net profit after tax (AUD millions) Revenue from licence sales (AUD millions) 53.2 70.3 84.5 91.2 91.2 8.5 14.3 16.0 18.5 19.2 28.0 41.0 45.7 53.4 52.6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2 2 Integrated Research and its controlled entities Annual Report 2018 Integrated Research and its controlled entities Annual Report 2018 Unified Communications 7% Testing 28% New customers: Paypal, Coles, JLL, BHP. R&D Investment 19% of Revenue IN MILLIONS OF AUD (EXCEPT EARNINGS PER SHARE) Year ended 30 June 2018 2017 % Change Revenue from licence fees 52.6 53.4 ‑2% Total revenue 91.2 91.2 0% Net profit after tax 19.2 18.5 4% Net assets 57.8 48.5 19% Cash at balance date 11.2 14.1 ‑21% Americas revenue 64.2 64.3 0% Europe revenue 13.7 14.9 ‑8% Asia Pacific revenue 13.2 11.6 14% Earnings per share (cents per share) 11.2 10.9 3% Our customers 9/10 Top US Banks 7/10 Biggest Telcos 6/10 Top Fin Services Companies Globally 6/10 Top Automotive Companies Year ended 30 June 2018 2017 % Change Americas revenue (USD) 49.5 48.2 3% Europe revenue (UK Sterling) 7.8 8.8 ‑10% Asia Pacific revenue (AUD) 13.2 11.6 14% 125+ of Fortune 500 Integrated Research and its controlled entities Annual Report 2018 3 3 Integrated Research and its controlled entities Annual Report 2018 Chairman’s Letter Dear fellow shareholders, The Company achieved a modest 4% increase in profit over the prior year to $19.2 million on revenue of $91.2 million. Growth would have been stronger but was held back by a number of factors, including a poor performing European operation, a cyclical downturn in Infrastructure and Avaya’s emergence from Chapter 11 bankruptcy midway through the financial year. Importantly, these factors are seen to be temporary, which would indicate a return to stronger performance in future periods. The fundamentals of the business are sound, as indicated by a strong maintenance retention rate of more than 95%. The Company grew most strongly in Asia Pacific, with revenues increasing 14% to $13.2 million. This was assisted by continued growth in licence sales of the core Prognosis software platform to service providers, call centres and enterprises that rely on Unified Communications (UC) systems. Revenue from the Americas increased by 3% to US$49.5 million, with growth offset from the cyclical downturn in Infrastructure. European sales declined 10% to £7.8 million, partly driven by poor trading conditions and partly due to internal factors. Management is currently making changes and I expect this situation will be rectified in the near future. Globally, the Company’s revenue from UC sales increased by 7% to $54.9 million. UC remains the Company’s largest line of business and continues to show strong potential as more enterprises and service providers adopt Prognosis to manage their UC and collaboration systems. The UC result was affected by Avaya remaining in Chapter 11 for half of the financial year and resulted in a 20% decline in licence revenue. Avaya has emerged from Chapter 11 in a much stronger financial position and is now investing for growth. It has also signed a reseller agreement with Integrated Research in July 2018, which enables Avaya’s salespeople to attain commissions and meet their quotas on Prognosis sales. The Company achieved strong UC licence sales growth from Cisco customers. The relationship with Cisco continues to deepen, as evidenced by the signing of a global distribution agreement that came into effect in January 2018. Cisco will now carry the Prognosis UC products in its global price book. This will enable Cisco’s salespeople to attain commissions and meet their quotas on sales of Prognosis. The Company delivered strong growth in Consulting and Testing Solutions during the year. Consulting fees increased by 9% to $7.4 million and sales of testing solutions increased by 28% to $5.2 million. Since its formation in 1988, the Company has become the global leader in providing software to manage performance and user experience for UC, payments systems and critical computing infrastructure. Its solutions give organisations such as banks and telecommunications companies a real‑time understanding of the performance of their systems. This ensures their users are not disrupted as they use an ATM, make an electronic payment or complete a video conference call. The Company serves more than 1,200 customers in over 60 countries. It added 72 new customers this year, including BHP, Coles, Bosch and PayPal and the service providers DXC Technology, Ethan Group and Inside One. This year’s results again show the diversity of the Company’s business and its ability to evolve its products to meet customers’ needs and expand into new areas. Prognosis is a differentiated, highly scalable technology platform that forms the basis of the majority of the Company’s products. It is built on a single code base that is leveraged across multiple portfolios. This allows for significant diversification and has enabled the Company to consistently maintain its margins. The introduction of AASB15 Revenue from Contracts with Customers accounting standard will not have a material effect on the Company’s revenues, based on historic contracts under the Company’s existing business model. Further detail can be found in Note 1 to the Financial Statements. The Company has a well‑crafted, multi‑pronged strategy to grow through developing products in adjacent markets. The Company will be releasing new products for Payments, UC and real‑time compliance monitoring. The company is also developing a number of artificial intelligence‑based applications for its current markets. 4 Integrated Research and its controlled entities Annual Report 2018 “Since its formation in 1988, the Company has become the global leader in providing software to manage performance and user experience.” Total expenses for the year were 4% higher at $66.9 million. Research and development expenditure was $17.3 million or 19% of revenue. This is up from 15% in the prior year and underlines the Company’s commitment to technical excellence. The Company’s balance sheet remains strong, with $11.2 million of cash at 30 June 2018 and no debt. The Board is pleased to announce a fully franked final dividend of 3.5 cents per share. The total dividend for the year is 6.5 cents per share franked at 100%, which compares to 6.5 cents franked at 85% for the prior financial year. Finally, I would like to express my sincere thanks to you, our valued shareholders, for your continued support. Steve Killelea Chairman Integrated Research and its controlled entities Annual Report 2018 5 CEO’s Report Dear shareholders, Since its inception, Integrated Research has proven that it has a sound business model and offers an enduring value proposition to customers facing complex problems. It has diverse sources of income, a range of products serving distinct markets, a strong innovation program, and world‑class customers and partners. Those customers include 125 Fortune 500 companies, nine of the top 10 US banks, seven of the world’s top 10 telecommunications companies and six of the top 10 automotive groups globally. They all turn to the Company to gain clarity and insight into the performance of the millions of connected devices they depend on to run their operations, connect staff and communicate with their customers. During the year, the Company made changes that will drive further growth in its largest solution area, Prognosis for Unified Communications (UC). The Company cemented its long‑term partnership with the global leader in UC solutions, Cisco, by being selected to join its SolutionsPlus program. Cisco now includes Prognosis solutions for UC, video conferencing and contact centres in its global price list ‑ alongside its own competitive monitoring solution. The Company welcomed its first Cisco SolutionsPlus customer, Jones Lang LaSalle, in June. Sales of Prognosis to customers with Cisco equipment increased by 60% during the year, making them a significant contributor to the growth in the Company’s UC product line. The Company signed a similar global resale arrangement with Avaya in July 2018 and is the only company to support every major UC vendor. This will be significant as customers implement UC solutions from Avaya, Cisco and Microsoft, in particular. The Company saw lower UC licence sales to Avaya customers during the year and flat sales to Microsoft Skype for Business customers after two years of strong growth. This followed Avaya’s slow recovery from bankruptcy protection and mixed messaging from Microsoft about Skype for Business and Microsoft Teams. However, Microsoft has clarified its positioning and Avaya has completed its restructure and begun investing for growth. This should see customers buying their solutions again, with flow‑on benefits for sales of Prognosis. The Company expects to see these changes and the expanded Cisco relationship underpin strong growth in UC in FY2019. It also expects to see growth in sales of Prognosis to service providers as more enterprises outsource their UC systems. To bring new products to market and drive future growth, the Company expanded its research and development (R&D) team in Sydney by approximately 30 staff. These additions increased total staff numbers to 260 people. Assisted by this increased capacity, the Company released major upgrades to all product lines, including its Call Recording Assurance (CRA) regulatory technology. CRA is an artificial intelligence‑based speech analytics platform that verifies that 100% of calls recorded by regulated entities such as traders and brokers are intelligible. An innovative new, cloud‑based platform is being developed that will enable the Company to expand into new markets, while also adding value to existing Prognosis customers. That platform will be released in the second half of the year and it will serve as a foundation to enable customers to gain greater intelligence and actionable insights from a growing number of connected devices. The Company is focused on improving its performance in Europe. The 10% decline in sales in the year can be attributed to its operations being sub‑scale and to internal execution. These issues are being addressed through a restructure of that business, which is well underway. In the Americas and Asia Pacific, the Company is building on its strengths. The Americas is its largest sales region and recorded growth in UC and Payments solutions, but a cyclical decline in Infrastructure sales limited total growth to 3%. Revenue in the Asia Pacific grew by 14% over the prior year, with licence sales growing across all product lines. Growth in UC and contact centre licence sales exceeded 70%. 6 Integrated Research and its controlled entities Annual Report 2018 “An innovative new, cloud‑based platform is being developed that will enable the Company to expand into new markets.” I would like to highlight the addition of three new members to the Company’s capable leadership team. They are Vanessa Walker as General Manager of People and Culture, Greg Clancy as Chief Product Officer and Michael Tomkins as Head of Development. The Company also greatly appreciates the exceptional contribution its talented team makes around the world and the continued support of its shareholders. John Merakovsky CEO Integrated Research and its controlled entities Annual Report 2018 7 People & Leaders Standards Delivering great results Driving and supporting growth and change Building strong and productive relationships Personal growth Maintaining purpose and integrity Committed and proud of what we do 8 8 Integrated Research and its controlled entities Annual Report 2018 Integrated Research and its controlled entities Annual Report 2018 About IR IR is the corporate brand name of Integrated Research Limited, the leading global provider of proactive experience management solutions for critical unified communications, payments, contact centres and IT infrastructure ecosystems. More than 1,200 organisations in over 60 countries ‑ including some of the world’s largest banks, airlines and telecommunications companies rely on IR Prognosis to provide business critical insights and ensure continuity‑critical systems deliver high availability and performance for millions of their customers across the globe. Today IR Prognosis experience management solutions are trusted by 125+ of the Fortune 500 companies to keep their business running. Why customers buy IR Prognosis provides assurance by recognising issues, predicting disruption and providing prescriptive guidance so customers can solve problems fast. Why we succeed IR helps organisations replace reactive, manual systems with proactive, automated technology for managing the performance of their environments. Our customers rely on us to guarantee millions of interactions and transactions occur without incident, every day. Our purpose To create clarity and insight in a world of connected devices. Our vision To make the world a smarter, easier place to live and work in, where people and technology interact in a frictionless way. Our mission To create innovative technology that optimises operations, predicts business disruption and automates the steps to improve the experience of every interaction. Our momentum IR celebrates its 30th year in business and remains an industry pioneer with innovative technology allowing businesses to stop problems before they even happen. As IR embarks on its strategic journey with cloud analytics our commitment to investing in the future to bring a new realm of opportunities sits at the core of every decision we make. 9 Integrated Research and its controlled entities Annual Report 2018 2018 in IR Over 30 years, we have seen a lot of change but remained true to our core values: Innovation, Customer First, Teamwork, High Performance and Leadership. Innovation Innovation is the vital ingredient that drives growth, attracts new business and draws talent to our business. This year, we delivered great innovations with Prognosis for Cloud UC and UC Assessor, and our inclusion in Cisco’s SolutionsPlus program. Our Innovation Day hackathon attracted a record number of submissions and we launched i365 as an internal initiative to drive innovation. We increased our investment in research and development to bring new products to market and drive future growth. We also released major upgrades to all product lines, including an artificial intelligence (AI) based speech analytics platform. We will release a new cloud analytics platform that interoperates with all versions of Prognosis, whether it is on‑premises, hybrid or in the cloud, in the second half of FY2019. Customer First This year’s IR Summit was once again very valuable in allowing us to gain an in‑depth understanding of our customers. A record 140 [customers and partners] participated in hands‑on lab sessions, innovation discoveries and best‑practice reviews. Our Meet the Expert event in Cologne, Germany, has also established a loyal support group, with 75% of customers returning this year. In the UK, our Customer First approach delivered to BT is a stellar example of how going the extra mile with a service provider can yield a strong long‑term partnership. In Asia Pacific, our team has met with customers in all corners of the region from events run by customers such as HPE TTS, to vendor roadshows like Avaya Engage, Skype for Business user groups and Cisco Connect. We have invested in customer‑facing systems, including the IR Community, and new roles such as Customer Success Managers. And, of course, we have also focused heavily on the quality of our products to drive satisfaction. Globally, we are striving to ensure our Customer First value is centre stage in everything we do. Prognosis for Unified Communications Prognosis for Unified Communications is the leading proactive experience management solution for unified communications (UC) on‑premises, hybrid or in the cloud. It enables our customers to deliver the best user experience possible for collaboration, meetings and voice or video calls across Avaya, Cisco and Microsoft UC solutions. Prognosis for Payments Prognosis for Payments helps customers de‑risk deployments of new technology and reap the benefits from their investment sooner. Prognosis performance management is specifically designed to give complete real‑time visibility into payments handled by processors such as ACI and FIS, and customers’ internal systems. Prognosis for Contact Center Prognosis for Contact Centre ensures the quality of customer interactions across multiple channels, including voice, video and the web. It helps make sure that contact centre systems deliver the performance that organisations expect so they can provide high‑quality experiences for customers, make agents more efficient, and gain revenue and cost benefits. We expanded our contact centre solutions with new offers that ensure the quality of call recording activities and stress‑test the performance of systems. Prognosis for Infrastructure Prognosis for Infrastructure manages the performance of IT systems and spots patterns in data so that customers can stop problems in their tracks. This means they can make systems work better, respond faster, prevent outages and get back to doing what they do best. 10 Integrated Research and its controlled entities Annual Report 2018 “When an idea comes to you or when a particular issue arises the community gives you the opportunity to interact with a myriad of people who have many different ideas and responses to it.” ‑ John Merakovsky, CEO, IR Leadership Strong leadership is key to spearheading strategic direction and overcoming challenges. We augmented our leadership team, hiring Vanessa Walker as our Global Head of People and Culture, Greg Clancy as Chief Product Officer and Michael Tompkins as Head of R&D. We also took time to define our purpose, giving our team a common direction to deliver on the long‑term needs of the organisation and ensure IR continues to grow for the next 30 years. Innovation Leadership Values Customer First High Performance Teamwork 11 Integrated Research and its controlled entities Annual Report 2018 1212 Integrated Research and its controlled entities Annual Report 2018 Integrated Research and its controlled entities Annual Report 2018 Directors’ Report Contents 14 Review of operations 17 Outlook and strategy for 2019 20 Board of Directors 22 Senior management 24 Directors’ interests 25 Share options and performance rights 27 Remuneration report (audited) Integrated Research and its controlled entities Annual Report 2018 13 13 Integrated Research and its controlled entities Annual Report 2018 Directors’ Report Annual revenue comparable Licence Fees 2% Annual after tax profit 4% $91.2M $52.6M $19.2M Review and results of operations Overview The Company achieved an after‑tax profit of $19.2 million, a 4% increase in annual after tax profit over the prior year which is within the guidance provided to the Australian Stock Exchange on July 13, 2018. The result was driven through modest licence sale growth in the Unified Communications product line offset by a cyclical downturn in the Company’s Infrastructure product lines. Revenue by geography was mixed with Asia Pacific up 14% to A$13.2 million, the Americas up 3% to US$49.5 million and Europe down 10% to £7.8 million. Review of operations and activities Principal activities Integrated Research Limited’s principal activities are the design, development, implementation and sale of systems and applications management computer software for business‑critical computing, Unified Communication networks and Payment networks. Group overview Integrated Research has a thirty year heritage of providing performance monitoring, diagnostics and management software solutions for business‑critical computing environments. Since its establishment in 1988, the Company has provided its Prognosis products to a cross section of large organisations requiring high levels of computing performance and reliability. Prognosis is an integrated suite of monitoring and management software, designed to give an organisation’s management and technical personnel operational insight into and optimise the operation of their HP NonStop, distributed system servers, Unified Communications (“UC”), and Payment environments and the business applications that run on these platforms. Integrated Research has developed its Prognosis products around a fault‑tolerant, highly distributed software architecture, designed to achieve high levels of functionality, scalability and reliability with a low total cost of ownership. Integrated Research services customers in more than 60 countries through direct sales offices in the USA, UK, Germany, Singapore and Australia, and via a global, channel‑driven distribution network. Integrated Research’s customer base consists of many of the world’s largest organisations and includes major stock exchanges, banks, credit card companies, telecommunications carriers, technology companies, service providers and manufacturers. The Company generates its revenue from licence fees, recurring maintenance, testing solutions and consulting services. Revenue from the sale of licences where there are no post‑delivery obligations is recognised in profit at the date of the delivery of the licence key. Revenue from maintenance contracts is recognised rateably over the service agreement. Revenue from consulting services and testing solution services is recognised over the period the services are delivered. 14 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Revenue Revenue of $91.2 million was comparable to the prior year. Licence fees decreased by 2% to $52.6 million with 9% licence growth in Unified Communications being more than offset by licence sale reductions in Payments and Infrastructure. The following table presents Company revenues for each of the relevant product groups: In thousands of AUD Unified Communications Infrastructure Payments Consulting Total revenue 2018 54,865 20,838 8,105 7,367 91,175 2017 51,132 24,449 8,804 6,784 91,169 % Change 7% (15%) (8%) 9% 0% Unified Communications (UC) revenue rose 7% over the previous year with strong growth from Cisco customers offset by lower sales in the Avaya channel. Licence sales to Skype for Business customers was down 2% over the prior year. The cyclical downturn in Infrastructure revenues was deeper than anticipated with overall revenues declining 15% over the previous year. Licence transactions sold during the year were closed on a multi‑year term basis with maturities averaging just under three years. Payments revenue declined 8% over the previous year with strong licence sale growth in Asia Pacific and the Americas being more than offset by a decline in Europe. Despite the overall reduction, the global payments pipeline would indicate a return to growth in the coming year. The following table presents Company revenues for each of the relevant geographic segments in underlying natural currencies: Americas (USD’000) Asia Pacific (A$’000) Europe (£’000) 2018 49,519 13,189 7,849 2017 % Change 48,207 11,596 8,752 3% 14% (10%) The Americas revenue grew by 3% over the prior year. Strong Prognosis sales to UC service providers was partially offset by the cyclical decline in Infrastructure sales. Asia Pacific achieved growth of 14% with strong second half licence growth in Unified Communications. Trading conditions in Europe was challenging with the operation reporting a 10% decline over the prior year. Expenses The following table presents the Company’s cost base compared to the preceding year: In thousands of AUD Research and development expenses Sales, consulting and marketing expenses General and administration expenses Total expenses 2018 15,335 45,703 5,849 66,887 2017 % Change 14,862 43,605 6,086 64,553 3% 5% (4%) 4% 15 Integrated Research and its controlled entities Annual Report 2018 Total expenses were up 4% to $66.9 million. The Company continues to aggressively invest for growth with total staff numbers increasing by 16% over the course of the year to close at 260. Gross spending on research and development expenditure represents 19% of total revenue compared to 15% for the prior year: In thousands of AUD Gross research and development spending Capitalisation of development expenses Amortisation of capitalised expenses Net research and development expenses Gross spend as a % of revenue 2018 17,341 (11,524) 9,518 15,335 19% Shareholder returns Returns to shareholders remain strong through the payment of franked dividends: Net profit ($’000) Basic EPS Dividends per share Dividend franking percentage Return on equity 2018 $19,180 11.19¢ 6.5¢ 100% 33% Financial position The following table presents key items from the consolidated statement of financial position: In thousands of AUD Assets: Cash and cash equivalents (current) Trade and other receivables (current and non‑current) Intangible assets (non‑current) Liabilities: 2017 % Change 13,430 (8,588) 10,020 14,862 15% 2017 $18,520 10.86¢ 6.5¢ 85% 38% 29% (34%) (5%) 3% 2016 $16,029 9.42¢ 6.5¢ 58% 39% 2018 2017 11,238 71,078 21,938 14,113 59,297 19,934 Deferred revenue (current and non‑current) 32,014 28,488 Equity 57,838 48,520 The Company’s end of year cash position was $11.2 million, 20% lower compared to the prior year. The increase in trade and other receivables is a result of higher licence fees toward the end of the financial year and the continued offering of deferred payment terms to customers. The increase in deferred revenue is driven in part by a stronger consulting backlog and in part by a lower Australian dollar at the end of the year. The consolidated statement of financial position presented at page 47 together with the accompanying notes provides further details. 16 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Outlook and Strategy for 2019 Thirty years on from its inception, Integrated Research continues to provide the world’s leading enterprises and organisations clarity and insight into the operations of their mission critical systems. Unified Communications is now the largest portfolio segment. Having all but replaced fixed‑line telephony across the world, billions of voice and video calls and collaboration sessions are conducted every day, with business communication reliant on the quality of these experiences. IR Prognosis monitors and analyses these interactions to optimise the experience; no jitter, no latency, no interruptions. On the Payments side of the business, hundreds of millions of people conduct billions of payments transactions using their credit cards or through ATMs. IR Prognosis is used by the world’s largest card issuers, banks, processors and merchants to ensure these transactions are processed flawlessly without network and infrastructure failure, thereby maximising the revenue of these organisations and ensuring consumers in economies across the world have a flawless experience. IR’s competitive advantage derives from the company’s know‑how and unique intellectual property (IP). The architectural design enables real time insight, monitoring, fault root‑cause analysis, business and operational analytics, performance management and optimisation. Being 100% software‑based, the solution is highly scalable, extremely flexible and delivers very deep visibility into the diversity of systems and applications that it manages. As such, Prognosis is ideally suited to complex, high transaction volume, mission critical and high traffic environments. Both the increasing nature of business complexity, and the unique IP, make Prognosis more relevant and needed in today’s business world than it was at its origin thirty years ago. We experience competition in various forms in each of our markets. Firstly, some of the large telephony and payment vendors have developed their own performance management software. These bespoke solutions are generally inferior to Prognosis both in terms of the depth of the metrics captured and analysed (which directly translates into the power of insight and speed of issue resolution) and the inability to monitor heterogeneous multi‑vendor environments, as is most often the case. Secondly, some of the large solution software vendors have developed performance management products, which again lack the depth and insight of Prognosis, this discipline not being their core specialisation. Occasionally in specific niches, IR competes with smaller, lower‑cost start‑ups. Across all three competitive segments, customers choose IR when they value the quality of experience, insight and operational optimisation that Prognosis delivers. We remain focused on sustaining our competitive advantage in a world of connected devices, through continuing innovation that comes from our research and development efforts. Through deep visibility, forensic analysis into the root cause of problems, extensive analytics at multiple levels and new automation capabilities, Prognosis enables proactive and rapid resolution of issues, capacity management as well as operational, cost and user experience optimisation. Our solutions provide insight into potential issues before they become business‑critical. Prognosis helps users improve their operational maturity by proactively minimising expensive outages, lowering costs, improving user satisfaction, retaining and growing customers and optimising IT operations and resources. 17 Integrated Research and its controlled entities Annual Report 2018 Outlook and Strategy for 2019 (continued) Prognosis is progressively using its real‑time access to big data to generate and deliver insights into a customer’s business that goes beyond improving and optimising operational efficiency. These capabilities today are delivered on‑premises, and increasingly in the cloud. We are at heart a data company, and are using our deep understanding of infrastructure, payments and UC networks to build cloud‑based analytics products that leverage our aggregated customer‑data to predictively model potential issues and provide resolution strategies before business interruption. This cloud analytics capability has been designed for consumption by all our customer base; across infrastructure, payments and UC, and whether the platform to be monitored is on‑premises or in the cloud. The Company’s growth comes from expanding the capabilities delivered into existing markets and customers, expanding our sales and service capabilities into new geographic markets as they mature and adopt these core technologies, and by creating new products that open new markets. Whilst the bulk of our revenues are earned in three core markets (Infrastructure, Communications and Payments) we have leveraged our voice know‑how into the speech analytics space, particularly in markets where regulation requires that companies record all their calls, and that these recordings must be reliably recorded and intelligible for compliance purposes. Known as Call Recording Assurance, this is a significant growth opportunity for IR. Whilst growth in this segment has been strong, this has not yet become a material part of the business. Our Infrastructure customers include users of high‑end computing systems such as the HP Enterprise NonStop platform for financial, telecommunication, trading, manufacturing and other high‑volume, high‑value mission critical transaction environments. NonStop remains at the operational core of many of the world’s largest companies, and is an important part of the HPE sever strategy. We continue to invest in Prognosis for Nonstop to be aligned with HPE and its customers. New customers continue to adopt Unified Communications (UC) applications such as audio and video conferencing, instant messaging, collaboration, mobility and tele‑presence, and the number of transactions and multi‑party collaboration events is growing rapidly across enterprises worldwide. We anticipate further growth in this segment as customers migrate away from legacy platforms to modern, flexible and collaboration‑enabled solutions that provide greater communication efficacy than voice alone. UC networks are becoming more pervasive, more mission critical and more complex and as such they require effective performance and user experience management. This complexity and high performance demand generates a need for solutions such as Prognosis, and we therefore expect to benefit from this need in terms of further growth. The company will continue to invest in R&D to expand the suite of Prognosis for UC products to cover more platforms, vendors and applications, and by doing so increase the Company’s addressable market and revenue potential. This includes vendors providing ‘Unified Communications as a Service’, for example Microsoft Teams and Cisco Webex Teams. Prognosis has been used worldwide to monitor voice and video quality and performance for Cisco UC solutions since 2000. Whilst we initially competed directly with Cisco’s own monitoring solution, our success in selling to and managing many large and complex Cisco implementations paved the way to IR joining Cisco’s elite SolutionsPlus program in the second half of FY18. This is Cisco’s partner ecosystem and online marketplace that enables their global channel partners to select and buy the best technologies that support Cisco products, in order to build and deploy the best and most scalable solutions for their customers. Since the launch of Prognosis in SolutionsPlus, our sales pipeline from this channel has grown significantly. We anticipate significant demand and growth in Prognosis sales through this extensive channel, which is responsible for 80 percent of Cisco’s annual revenue. Prognosis is an embedded component of the HCS‑G service, Cisco’s dedicated collaboration environment for the US Federal Government, which is being sold exclusively through major System Integrators such as AT&T, Verizon, WWT and IronBow. Compliance with both the US Government Federal Information Processing Standards (FIPS 140‑2) and the Federal Risk and Authorization Management Program (FedRAMP) provides significant future revenue opportunities for IR in partnership with Cisco in the US Federal Government market. The timing of revenue for IR is dependent upon the uptake of the overall solution by the US Federal Government. Microsoft’s Skype for Business is now one of the leading global UC solutions for both enterprises and service providers. IR has capitalised on this growth by introducing three Microsoft‑specific products, which are now widely used by a proportional share of our customer base, alongside our Cisco and Avaya solutions. Prognosis UC Assessor is our Microsoft‑certified cloud‑delivered product that provides a comprehensive, end‑to‑end assessment and troubleshooting solution for customers migrating to Skype for Business, be that in the cloud, hybrid or on‑premises. Microsoft partners and customers rely on this software‑as‑a‑service platform to assess and plan their Skype for Business or Teams infrastructure implementation, which both increases our revenue opportunities earlier in the lifecycle and provides a natural move to using Prognosis as the core monitoring solution for their UC environment. 18 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Microsoft continues to support Skype for Business on‑premises, and have also incorporated this core technology into their Office 365 Teams cloud‑based collaboration platform. Through our close partnership with Microsoft and our reputation as a leading vendor in the Microsoft ecosystem, IR is well positioned to support customers regardless of which deployment platform they choose; cloud, hybrid or on‑premises. Due to both general economic growth and the explosion in the use of pin‑less card transactions such as Paywave and Paypass, payment transaction volumes have grown massively across all of our markets, placing enormous demand on our customers’ infrastructure and therefore increased reliance on Prognosis. We have expanded its suite of Payments solutions by adding new data and analytics capabilities; this expands the company’s addressable market in the Payments segment and increases revenue potential. We will maintain this strategy in the Payments market and work with its leading customers and partners to support the adoption of new payments types. The strategic alliance with ACI, a global leader in the payments market, continues to support our Payments business. IR Consulting Services provide Prognosis customers with implementation, customisation and training services to ensure that they get the most out of their investment in Prognosis. Consulting Services also help IR configure unique and repeatable solutions that extend the use and value of Prognosis. The Company will continue to invest in people and processes to grow consulting revenue and margin. Due to scalability, reliability and ultimately the business insight it provides, Prognosis has proven to be a sticky solution, with historical renewal rates continuing to be maintained above 90%. To ensure that our customers obtain highest The proportion of our revenue from one‑off perpetual deals has reduced significantly and deliberately, replaced by new recurring multi‑year deals. We have proven our capability to acquire new customers, adding 72 new logos during the 2018 financial year. Supported by strong growth drivers particularly in UC, our continued focus on new customer acquisition and our long‑term cloud roadmap are four significant factors that management expects to support growth through the financial year ending 30 June 2019 and beyond. economic benefit from Prognosis, we have built a service and support culture that maximizes adoption within our customer base and focusses on delivering their critical success criteria and subsequently the high levels of satisfaction and advocacy. This approach naturally results in a high level of renewal and expansion of share of wallet. Analysis of the Company’s customer base of over 1,200 enterprise customers shows significant potential to cross‑sell. Prognosis is a modular solution and customers will typically purchase only a small subset of those modules on their initial purchase. Subsequent purchases may include additional solutions such as Reporting and Analytics, Video Management, Testing solutions, Contact Centre and Call Recording Assurance to name some of the most commonly applicable. The foundations of our business model are extremely strong. With 88% of our revenue now recurring as multi‑year deals, and retention rates across our portfolio greater than 90%, the compounding impact of recurring term renewals coupled with the expansion of our share of customer wallet, contributes significantly to strong future earnings. 19 Integrated Research and its controlled entities Annual Report 2018 Directors The directors of the Company at any time during or since the end of the financial year are listed below: Steve Killelea AM Non‑Executive Director and Chairman John Merakovsky B.Sc (Hons) PhD Managing Director and Chief Executive Officer Steve founded Integrated Research in August 1988 and held the position of Managing Director and Chief Executive Officer until retiring from his executive position in November 2004. He was appointed as a Non‑Executive Director in November 2004 and elected Chairman in July 2005. Steve is also Chairman of the Institute for Economics and Peace, Smarter Capital and The Charitable Foundation and for activities involved with these he has received a number of international awards including the Order of Australia, Luxemburg Peace Prize. Steve’s current term will expire no later than the close of the 2018 Annual General Meeting. Listed company directorships held in the past three years: None. Age: 69 years. John joined IR in July 2017 as the Company’s Chief Executive Officer and was appointed Managing Director in September 2017. John is a veteran of the digital industry with 25 years of experience working in technology and digital companies. This includes extensive experience in commercialising technologies as an entrepreneur, consultant, Managing Director, CEO and General Manager of various companies. Prior to joining IR, John was the General Manager of Seek Learning (the education arm of Seek Ltd) and was previously the Managing Director of Experian ANZ, having served as its Managing Director of Marketing Services Asia‑Pacific for 5 years. Listed company directorships held in the past three years: None. Age: 50 years. Paul Brandling BSc Hons, MAICD Independent Non‑Executive Director and Deputy Chairman Nick Abrahams B Comm, LLB (Hons), MFA Non‑Executive Director Paul was appointed a Director in August 2015. He has worked in the information technology industry for over 30 years and has broad experience in hardware, services and software. He has previously held the positions of Vice President and Managing Director of Hewlett‑Packard South Pacific plus Vice President and Managing Director of Compaq South Pacific. From 2001 to 2012, Paul was a member of the International CEO Forum (Australia) and served as a Director of the Australian Information Industry Association (AIIA) from 2002 to 2011. Mr Brandling was previously a Director of Amcom Telecommunications Limited until its acquisition, was a Director of Vocus Communications Limited until February 2016 and previously a Director of Tesserent Limited (ASX: TNT) until October 2017. He currently serves as a Non Executive Director of Infomedia Ltd (ASX: IFM) and Avoka Technologies Pty Ltd. Paul’s current term will expire no later than the close of the 2018 Annual General Meeting. Nick was appointed as a Director in September 2014. Mr. Abrahams is highly experienced in corporate, intellectual property and international law pertaining to the technology industry, with over 20 years’ experience as a private practice lawyer. He has worked extensively internationally representing Australian high‑tech companies as well as working for three years with a law firm in Japan. Mr Abrahams also spent time working in the United States in the late nineties and was an executive with Warner Brothers in Los Angeles, followed by a period as a senior executive at listed technology company, Spike Networks, also in Los Angeles. Mr Abrahams returned to legal practice in 2002 and is a partner of and is global leader for the technology and innovation practice of a global law firm. Mr. Abrahams is on the Board of the Vodafone Foundation, on the Board of Sydney Film Festival and is a Director of the Garvan Research Foundation. Nick’s current term will expire no later than the close of the 2020 Annual General Meeting. Listed company directorships held in the past three years other than listed above: None. Listed company directorships held in the past three years other than listed above: None. Age: 60 years. Age: 52 years. 20 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Garry Dinnie BCom, FCA, FAICD, FAIM, MIIA(Aust) Independent Non‑Executive Director Peter Lloyd MAICD Non‑Executive Director Garry was appointed a Director in February 2013. He is a Director & Chair of the Audit & Risk Committee of CareFlight Limited, Australian Settlements Limited and a Director of a number of private companies. He is also the Chair or member of a number of Audit & Risk Committees of NSW public sector and private sector entities. He was previously a partner with Ernst & Young for 25 years specialising in audit, advisory and IT services. Garry’s current term will expire no later than the close of the 2019 Annual General Meeting. Listed company directorships held in the past three years other than listed above: Inabox Group Limited Age: 66 years. Peter was appointed Director in July 2010. He has over 40 years’ experience on computing technology, having worked for both computer hardware and software providers. For the past 35 years, Peter has been specifically involved in the provision of payments solutions for banks and financial institutions. He is currently the proprietor of The Grayrock Group Pty Ltd, a management consultancy company focusing on the payments industry. Peter is a Non‑Executive Director of Taggle Pty Ltd. And a Non‑Executive Director of Flamingo AI Limited (ASX: FGO). Peter’s current term will expire no later than the close of the 2019 Annual General Meeting. Listed companies directorships held in the past three years: None. Age: 64 years. Company Secretary David Purdue BEc, MBA, Grad Dip CSP, FCA, FGIA, FCIS, GAICD David was appointed Company Secretary in July 2012. David was also the Company’s Global Commercial Manager until his retirement in July 2016. Prior to this, David spent three years at Integrated Research’s Colorado office to manage the Americas finance operations. David is a Chartered Accountant and Chartered Secretary with over 25 years experience in both professional practice and industry. Anne Myers MBA, GAICD Independent Non‑Executive Director Anne was appointed a Director in July 2018. Ms. Myers has worked in the finance and technology industry for over 30 years with experience in business strategy, technology, digital innovation and operational functions. Anne is the former Chief Operating Officer and CIO of ING Direct Australia and has acted in executive technology and business roles for QBE, Macquarie Bank and St George Bank. She currently acts as an advisory board member to early phase technology innovators, including TokenOne Pty Limited, is a director of Defence Bank Limited and United Way Australia Limited and is a Council Member of the University of New England. Ms. Myers has also worked in the not for profit sector for United Way Australia, and was a member of the Industry Advisory Network for the University of Technology. Anne’s current term will expire no later than the close of the 2018 Annual General Meeting. Listed companies directorships held in the past three years: None. Age: 60 years. 21 Integrated Research and its controlled entities Annual Report 2018 Senior management Peter Adams B.Com, CA Chief Financial Officer Peter joined IR in March 2008 and is responsible for overseeing the Company’s finance and administration, including regulatory compliance and investor relations. Peter is a Chartered Accountant with over 25 years experience. He has held a number of senior accounting and finance roles, including seven years as CFO with Infomedia (an ASX‑listed technology company), six years with Renison Goldfields (ex ASX top 100 Resources Company) and two years with Transfield Pty Ltd. Peter’s career began with Arthur Andersen, where he was responsible for managing large audit clients. Jason Barker BA (hons) Senior Vice President, Asia Pacific, Middle East & Africa Jason joined IR in October 2014 and is responsible for all business operations across the Asia Pacific, Middle East & Africa regions. Jason joins with 20 years’ experience in Technology, Media & Telecommunications most recently as Vice President Sales, Asia Pacific at Acision where, based out of Singapore, he was responsible for leadership of the Sales team across the region. Prior to this Jason spent 5 years in Australia leading Asia Pacific teams with Subex and Surfkitchen and before this held several European focussed roles, based out of the UK. Greg Clancy B.App.Sc (CompSc) (Hons), MCS, D.E.S.S. (AI) Chief Product Officer Greg joined IR in July 2018 and is responsible for the strategy, delivery, and commercialisation of the IR’s product and platform portfolio. With more than 20 years of senior product leadership at global enterprise software companies Greg is a champion of technology innovation and setting product vision and strategy for industry defining impact. Most recently he was based in Silicon Valley, California responsible for transforming Ivanti to the cloud while injecting innovation around analytics, machine learning, bots, and automation. Andre Cuenin BSc, MBA President Americas & VP European Field Operations Andre joined IR in October 2008 and is responsible for all business operations in both the Americas and Europe region. Andre has over 25 years experience in IT sales, including VP of Field Operations at Stratavia, where he was responsible for sales and professional services marketing worldwide. Prior to this he spent 15 years with CA (previously known as Computer Associates) in several senior management positions including VP of Worldwide Sales Operations. Kevin Ryder M.Mgt, MBA Chief Marketing Officer Kevin joined IR in October 2013 and is responsible for global brand, marketing and customer experience. He has extensive experience in the ICT industry, including leadership roles in Europe, North America, Asia and Australia. Prior to joining IR, Kevin was the Enterprise Marketing Director at Microsoft and has previously held senior executive roles at KAZ Group, Attachmate and Eicon Technology. Kevin was ranked #18 by CMO Magazine in the 2015 CMO50 list, recognising Australia’s most innovative chief marketing officers. Vanessa Walker B.Bus General Manager, People & Culture Vanessa joined IR in September 2017 as the General Manager, People & Culture. Vanessa has extensive experience in both strategic & operational commercially driven HR roles, particularly in the technology sector with companies such as Experian, Hyperion, Sage & Hitachi Data Systems. This includes a strong focus on Talent Management, Culture & Employee Engagement across Asia Pacific through leadership of regional HR teams & and globally via active participation in the organisations’ global HR Councils. 22 Integrated Research and its controlled entities Annual Report 2018Directors’ Report The directors present their report together with the Financial Statements of Integrated Research Limited (“the consolidated entity”), being the Company and its controlled entities, for the year ended 30 June 2018 and the Auditor’s Report thereon. Results The net profit of the consolidated entity for the 12 months ended 30 June 2018 after income tax expense was $19.2 million. Dividends Dividends paid or declared by the Company since the end of the previous financial year were: Final 2017 ‑ Ordinary shares Interim 2018 ‑ Ordinary shares Final 2018 ‑ Ordinary shares 100% franked 100% franked 100% franked 3.5 3.0 3.5 5,987 5,150 26 Sep 2017 10 Apr 2018 6,009 16 Oct 2018 Cents Per share Total Amount $’000 Date of Payment Events subsequent to reporting date For dividends declared after 30 June 2018 see Note 22 in the financial statements. The financial effect of dividends declared and paid after 30 June 2018 has not been brought to account in the financial statements for the year ended 30 June 2018 and will be recognised in subsequent financial statements. Future developments Likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations are referred to generally in the Review of Operations and Activities Report. Further information on likely developments including expected results would be in the Directors’ opinion, result in unreasonable prejudice to the Company and has therefore not been included in this Report. Directors and company secretary Details of current directors’ qualifications, experience, age and special responsibilities are set out on pages 20 to 21. Details of the company secretary and his qualifications are set out on page 21. Officers who were previously partners of the audit firm No officers of the Company were partners of the current audit firm during the financial year. 23 Integrated Research and its controlled entities Annual Report 2018 Directors’ meetings The numbers of meetings of the Company’s board of directors and of each board committee held during the year ended 30 June 2018, and the numbers of meetings attended by each director were: Board Meetings Audit and Risk Committee Meetings Nomination and Remuneration Committee Meetings Strategy Committee Meetings A 12 12 12 12 11 9 B 12 12 12 12 12 9 A 4 4 4 ‑ ‑ ‑ B 4 4 4 ‑ ‑ ‑ A ‑ ‑ 3 ‑ 3 ‑ B ‑ ‑ 3 ‑ 3 ‑ A ‑ 4 ‑ 4 4 4 B ‑ 4 ‑ 4 4 4 Nick Abrahams Paul Brandling Garry Dinnie Peter Lloyd Steve Killelea John Merakovsky A: Number of meetings attended. B: Number of meetings held during the time the directors held office or was a member of the board or committee during the year. State of affairs In the opinion of the directors there were no significant changes in the state of affairs of the consolidated entity that occurred during the financial year under review. Environmental regulation The consolidated entity’s operations are not subject to significant environmental regulations under either Commonwealth or State legislation. Directors’ interests The relevant interest of each director in the shares, options or performance rights over ordinary shares issued by the companies in the consolidated entity and other relevant bodies corporate, as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Ordinary shares in Integrated Research Options Performance rights Directly held Beneficially held Total Number of options Number of rights Steve Killelea 67,855,619 337,612 68,193,231 John Merakovsky Nick Abrahams Paul Brandling Garry Dinnie Peter Lloyd ‑ ‑ 10,202 ‑ ‑ ‑ 5,042 ‑ 2,000 2,000 ‑ 5,042 10,202 2,000 2,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ 210,000 ‑ ‑ ‑ ‑ 24 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Share options and performance rights Options and performance rights granted to directors and senior executives During or since the end of the financial year, the Company granted performance rights for no consideration over unissued ordinary shares in Integrated Research Limited to the following named directors and executive officers of the consolidated entity as part of their remuneration: Directors John Merakovsky Executive Officers Peter Adams Alex Baburin Jason Barker Andre Cuenin Kevin Ryder Number of performance rights granted Performance hurdle Exercise price Expiry date 210,000 Yes Nil Sep 2020 20,000 15,000 20,000 25,000 15,000 No No No No No Nil Nil Nil Nil Nil Sep 2020 Sep 2020 Sep 2020 Sep 2020 Sep 2020 The performance rights were granted under the Integrated Research Performance Rights and Option Plan (established November 2011). Unissued shares under performance rights Unissued ordinary shares of Integrated Research Limited under performance rights at the date of this report are as follows: Expiry date Sep 2020 Sep 2020 Sep 2020 Mar 2019 Dec 2018 Sep 2018 Total performance rights Performance rights Exercise price Number of shares Nil Nil Nil Nil Nil Nil 210,000 110,000 439,000 90,000 60,000 90,900 999,900 Performance rights do not entitle the holder to participate in any share issue of the Company or any other body corporate. Indemnification and insurance of officers and auditors Indemnification The Company has agreed to indemnify the directors of the Company on a full indemnity basis to the full extent permitted by law, for all losses or liabilities incurred by the director as an officer of the Company including, but not limited to, liability for negligence or for reasonable costs and expenses incurred, except where the liability arises out of conduct involving a lack of good faith. To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst &Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment of this type has been made to Ernst & Young during or since the financial year. 25 Integrated Research and its controlled entities Annual Report 2018 Insurance During the financial year Integrated Research Limited paid a premium to insure the directors and executive officers of the consolidated entity and related bodies corporate. The liabilities insured include costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against officers in their capacity as officers of the consolidated entity. Remuneration report The Company’s Remuneration Report, which forms part of this Directors’ Report, is on pages 27 to 35. Corporate governance A statement describing the Company’s main corporate governance practices in place throughout the financial year is on pages 37 to 43. Non‑audit services During the year Ernst and Young, the Company’s auditor, has performed certain other services in addition to their statutory duties. The board has considered the non‑audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit & Risk Committee, is satisfied that the provision of those non‑audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non‑audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit & Risk Committee to ensure they do not impact the integrity and objectivity of the auditor, and • The non‑audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. A copy of the auditors’ independence declaration as required under Section 307C of the Corporations Act is on page 86 and forms part of the Directors’ Report. Auditor The Board granted approval under section 324DAA of the Corporations Act for Mr John Robinson to continue as lead auditor, to play a significant role in the audit of the Company for two additional successive financial years being the year ended 30 June 2018 and year ending 30 June 2019. The approval was granted in accordance with a recommendation from the Audit & Risk Committee who were satisfied the approval is consistent with maintaining the quality of the audit provided to the Company and would not give rise to a conflict of interest situation (as defined under 324CD of the Corporations Act). The decision is supported by the Audit & Risk Committee’s satisfaction with the quality of Ernst & Young and Mr Robinson’s work as auditor and that the Company maintains, and will continue to maintain, robust auditor independence policies and controls to ensure the independence of the auditor is maintained. Rounding of amounts to nearest thousand dollars The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 and in accordance with that Class order, amounts in the Financial Statements and the Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report is made in accordance with a resolution of the directors. Steve Killelea Chairman John Merakovsky Chief Executive Officer North Sydney, 16 August 2018 North Sydney, 16 August 2018 26 Integrated Research and its controlled entities Annual Report 2018Directors’ Report Remuneration report (audited) Remuneration policies Remuneration levels for key management personnel and secretaries of the Company, and relevant key management personnel of the consolidated entity are competitively set to attract and retain appropriately qualified and experienced directors and senior executives. The Nomination and Remuneration Committee obtains independent advice on the appropriateness of remuneration packages given trends in comparative companies both locally and internationally and the objectives of the Company’s remuneration strategy. Key management personnel (including directors) have authority and responsibility for planning, directing and controlling the activities of the Company and the consolidated entity. The remuneration structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The remuneration structure takes into account: • The capability and experience of the directors and senior executives • The directors and senior executives ability to control the relevant segment’s performance • The consolidated entity’s performance including: ‑ The consolidated entity’s earnings ‑ The growth in share price and returns on shareholder wealth Remuneration packages include a mix of fixed and variable remuneration and short and long‑term performance based incentives. Fixed remuneration Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any fringe benefits tax (FBT) related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. Remuneration levels are reviewed annually through a process that considers individual, segment and overall performance of the consolidated entity. In addition, external remuneration surveys provide periodic analysis to ensure the directors’ and senior executives’ remuneration is competitive in the market place. A senior executive’s remuneration is also reviewed on promotion. Performance‑linked remuneration Performance linked remuneration includes both short‑term and long‑term incentives and is designed to reward executive directors and senior executives for exceeding their financial and personal objectives. The short‑term incentive (STI) is an “at risk” bonus provided in the form of cash, while the long‑term incentive (LTI) is provided as either options or performance rights over ordinary shares of Integrated Research Limited under the rules of the share plans. Short‑term incentive bonus The Nomination and Remuneration Committee is responsible for setting the key performance indicators (KPIs) for the Chief Executive Officer, and for approving the KPIs for the senior executives who report to him. The KPIs generally include measures relating to the consolidated entity, the relevant segment, and the individual, and include financial, people, customer, strategy and risk measures. The measures are chosen as they directly align the individual’s reward to the KPIs of the consolidated entity and to its strategy and performance. The financial performance objectives vary with position and responsibility and are aligned with each respective year’s budget. The non‑financial objectives vary with position and responsibility and include measures such as achieving strategic outcomes and staff development. At the end of the financial year the Nomination and Remuneration Committee assesses the actual performance of the CEO against the KPIs set at the beginning of the financial year. A percentage of the predetermined maximum amounts for each KPI is awarded depending on results. The committee recommends the cash incentive to be paid to the CEO for approval by the board. Long‑term incentive Prior to the 2012 financial year, options were issued to executive directors and other senior executives under the Employee Share Option Plan. In November 2011, the Company established a new plan titled Integrated Research Performance Rights and Options Plan (“IRPROP”). Performance rights are issued to executive directors and other senior executives under the IRPROP. The ability of executive directors to exercise either options or performance rights is conditional on the consolidated entity achieving certain profit after tax (PAT) performance hurdles over the vesting period. PAT was considered the most appropriate performance hurdle given its intrinsic link to creating shareholder wealth. Performance hurdles are tested at each vesting date. 27 Integrated Research and its controlled entities Annual Report 2018 Consequences of performance on shareholder wealth In considering the consolidated entity’s performance and benefits for shareholder wealth, the Nomination and Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years: Licences ($’000) Net profit ($’000) Dividends paid ($’000) Closing share price Change in share price 2018 52,591 19,180 11,137 $3.11 ($0.11) 2017 53,441 18,520 11,088 $3.22 $0.97 2016 45,725 16,029 11,906 $2.25 $0.56 2015 41,031 14,251 10,162 $1.69 $0.695 2014 28,048 8,489 9,278 $0.995 ($0.04) Net profit and licence sales are considered in setting the STI, as two of the financial performance targets are profit after tax and new licences. The Nomination and Remuneration Committee considers that the above performance linked structure is generating the desired outcomes. Key Management Personnel The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Directors Full year Steve Killelea Chairman Nick Abrahams Paul Brandling Peter Lloyd Garry Dinnie Part year John Merakovsky Chief Executive Officer Other key management personnel Full year Peter Adams Chief Financial Officer Jason Barker Senior Vice President Asia Pacific Andre Cuenin President Americas & VP European Field Operations Kevin Ryder Chief Marketing Officer Part year Alex Baburin Chief Operations Officer Andrew Dutton Interim Chief Executive Officer 28 Integrated Research and its controlled entities Annual Report 2018Remuneration report (audited) Service agreements Service contracts for current executive directors and current senior executives are unlimited in term but capable of termination by either party according to a period specified in the employment contract and the consolidated entity retains the right to terminate the contract immediately by payment in lieu of notice or a severance payment or an amount for redundancy equal to the scale of payments prescribed in the NSW Employment Protection Act. Mr Peter Adams, Chief Financial Officer, has a contract of employment with Integrated Research Limited dated 23 January 2008, which provides for specific notice and severance undertakings of up to three months compensation depending on the particular circumstances. Mr Adams can terminate his employment by giving three months prior notice in writing. Mr Alex Baburin, Chief Operations Officer, had a contract of employment with Integrated Research Limited dated 18 October 2006, which provides for specific notice and severance undertakings of up to one month’s compensation depending on the particular circumstances. Mr Baburin can terminate his employment by giving one month’s prior notice in writing. Mr Jason Barker ‑ Vice President, APAC, has a contract of employment with Integrated Research Singapore Pte Limited dated 21 August 2014 and amended 11 April 2018 which provides for specific notice and severance undertakings of up to three month compensation depending on the particular circumstances. Mr Barker can terminate his employment by giving three month prior notice in writing. Mr Andrew Dutton, Interim Chief Executive Officer, provided services via a contractual agreement between Integrated Research and Odgers Interim Pty Ltd. The contractual agreement commenced in February 2017 through to July 2017. Mr John Merakovsky, Chief Executive Officer, has a contract of employment with Integrated Research Limited dated 9 June 2017, which provides for specific notice and severance undertakings of up to three months compensation depending on the particular circumstances. Mr Merakovsky can terminate his employment by giving three months prior notice in writing. Mr Andre Cuenin, President Americas & VP European Field Operations, has a contract of employment with Integrated Research Inc dated 22 September 2008, which provides for specific notice and severance undertakings of one month’s compensation depending on the particular circumstances. Mr Cuenin can terminate his employment by giving one month’s prior notice in writing. Mr Kevin Ryder ‑ Chief Marketing Officer, Global Marketing, has a contract of employment with Integrated Research Limited dated 14 October 2013, which provides for specific notice and severance undertakings of one month compensation depending on the particular circumstances. Mr Ryder can terminate his employment by giving one month prior notice in writing. Non‑executive directors Total remuneration for all non‑executive directors last voted upon at the Annual General Meeting in November 2013 is not to exceed $750,000 per annum. Director’s base fees during the financial year was $75,000 per annum inclusive of compulsory superannuation. The chairman receives the base fee by a multiple of two and the deputy chairman receives the base fee by a multiple of one and a half. Director’s fees cover all main board activities and committee membership. Directors can elect to salary sacrifice their directors fees into superannuation. Non‑executive directors do not receive performance related compensation or retirement benefits. 29 Integrated Research and its controlled entities Annual Report 2018 Directors’ and executive officers’ remuneration Details of the nature and amount of each major element of the remuneration of each of the key management personnel director of the Company and each of the executives and relevant group key management executives are reported below. The estimated value of options and performance rights disclosed is calculated at the date of grant using the Black‑Scholes methodology, adjusted to take into account the inability to exercise options during the vesting period. Further details of options and performance rights granted during the year are set out below. “Executive officers” are officers who are involved in, or who take part in, the management of the affairs of Integrated Research Limited and/or related bodies corporate. Remuneration for overseas‑based employees has been translated to Australian dollars at the average exchange rates for the year. No director or executive appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. Share‑ based pay‑ ments Other com‑ pensa‑ tion Long term Proportion of remuneration Long service leave $ Value of options and rights $ Termi‑ nation benefit $ Perfor‑ mance related Total $ Value of options and rights Post‑ em‑ ploy‑ ment Super‑ annua‑ tion contri‑ bution $ 6,507 7,204 6,507 6,507 13,014 Short term 2018 In AUD Salary & fees $ Bonus $ Non‑ cash benefits $ Non‑executive Directors Nick Abrahams 68,493 75,832 68,493 68,493 136,986 Paul Brandling (Deputy Chairman) Garry Dinnie Peter Lloyd Steve Killelea (Chairman) Executive Directors ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ John Merakovsky 462,106 82,460 ‑ 19,213 9,400 341,299 Executive officers (excluding directors) Peter Adams 310,419 68,524 4,532 20,049 6,728 17,062 Alex Baburin (to October 2017) 322,096 ‑ ‑ 12,346 5,576 ‑ Jason Barker 346,000 226,795 2,779 22,437 Andre Cuenin 349,672 377,658 12,615 10,415 Andrew Dutton* (to July 2017) 66,000 ‑ ‑ ‑ ‑ ‑ ‑ 39,686 49,565 ‑ Kevin Ryder 270,906 77,910 1,900 26,393 6,288 12,797 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 75,000 83,036 75,000 75,000 150,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 914,478 9% 37% 427,314 16% 4% 340,018 ‑ 637,697 799,925 36% 47% 66,000 ‑ ‑ 6% 6% ‑ 396,194 20% 3% 2,545,496 833,347 21,826 150,592 27,992 460,409 ‑ 4,039,662 Total compensation: key management (consolidated, including directors) 30 Integrated Research and its controlled entities Annual Report 2018Remuneration report (audited) Post‑ em‑ ploy‑ ment Super‑ annua‑ tion contri‑ bution $ 6,073 2,601 6,073 8,242 6,073 12,146 Short term 2017 In AUD Salary & fees $ Bonus $ Non‑ cash benefits $ Non‑executive Directors Nick Abrahams 63,927 27,374 63,927 86,758 63,927 127,854 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Alan Baxter (to December 2016) Paul Brandling Garry Dinnie Peter Lloyd Steve Killelea (Chairman) Executive Directors Darc Rasmussen (to February 2017) Share‑ based pay‑ ments Other com‑ pensa‑ tion Long term Proportion of remuneration Long service leave $ Value of options and rights $ Termi‑ nation benefit $ Perfor‑ mance related Total $ Value of options and rights ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 70,000 29,975 70,000 95,000 70,000 140,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 451,574 16% (45%) 456,379 449,290 634,628 892,190 12% 10% 33% 48% 17% 18% 8% 12% 551,746 72,500 2,644 19,616 6,737 (201,669) Executive officers (excluding directors) Peter Adams 292,916 54,817 4,532 19,616 6,200 78,298 Alex Baburin 286,707 42,695 ‑ 32,431 6,033 81,424 Jason Barker 346,000 211,717 2,779 22,437 Andre Cuenin 334,515 429,080 12,001 9,888 Andrew Dutton* (from February 2017) 323,400 David Purdue 69,002 ‑ ‑ ‑ ‑ ‑ 7,202 ‑ ‑ ‑ ‑ 51,695 106,706 Kevin Ryder 252,165 52,813 4,560 31,618 5,688 18,280 ‑ 365,124 Total compensation: key management (consolidated, including directors) 2,890,218 863,622 26,516 184,016 24,658 150,046 ‑ 4,139,076 ‑ 323,400 ‑ ‑ 15,312 91,516 0% 14% 17% 5% * Mr Andrew Dutton was appointed as the Company’s interim CEO. The amounts disclosed above reflect the cost to the Company for services rendered that were billed through an independent third party agent. The amounts disclosed therefore do not necessarily reflect the amounts received by Mr Dutton. 31 Integrated Research and its controlled entities Annual Report 2018 Analysis of bonuses included in remuneration Details of the vesting profile of the short‑term incentive cash bonuses awarded as remuneration to each director of the Company and each of the named Company executives and relevant group executives are detailed below: Directors John Merakovsky Executives Peter Adams Jason Barker Andre Cuenin Kevin Ryder Short term incentive bonuses Included in remuneration $ (A) % vested in year % forfeited in year (B) 82,460 68,524 226,795 377,658 77,910 47% 81% 93% 79% 87% 53% 19% 7% 21% 13% (A) Amounts included in remuneration for the financial year represents the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria. No amounts vest in future financial years in respect of the short‑term incentive bonus scheme for the 2018 financial year. (B) The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year. 32 Integrated Research and its controlled entities Annual Report 2018Remuneration report (audited) Equity instruments All options refer to options over ordinary shares of Integrated Research Limited, which are exercisable on a one‑for‑one basis under the Employee Share Option Plan (ESOP). Options and rights over equity instruments granted as compensation No options have been granted to named executives either during or since the end of the financial year. Performance rights granted as compensation are listed in the table below. Analysis of rights over equity instruments granted as compensation Performance rights granted Number Date Fair value per share ($) Percent vested in year Directors John Merakovsky 210,000 Nov‑17 3.595 ‑ Executives Peter Adams 100,000 20,000 Nov‑14 Sep‑17 Alex Baburin 100,000 Jason Barker 15,000 40,000 60,000 30,000 20,000 Andre Cuenin 100,000 50,000 25,000 Nov‑14 Sep‑17 Nov‑14 Nov‑14 Dec‑15 Sep‑17 Nov‑14 Dec‑15 Sep‑17 0.844 3.178 0.844 3.178 100% ‑ 100% 0.844 100% 0.775 1.846 3.178 ‑ ‑ ‑ 0.844 100% 1.846 3.178 ‑ ‑ David Purdue 50,000 Nov‑14 0.844 100% Kevin Ryder 75,000 15,000 Nov‑14 Sep‑17 0.844 3.178 100% ‑ ‑ 100% Percent forfeited in year (A) Financial year in which grant expires Value yet to vest or value vested ($) Min (B) Max (C) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 2021 nil 755,034 2018 2021 2018 2021 2018 2019 2020 2021 2018 2020 2021 nil nil nil ‑ nil nil nil nil nil nil nil 84,470 63,558 84,470 ‑ 33,788 46,494 55,377 63,558 84,470 92,294 79,448 2018 nil 42,235 2018 2021 nil nil 63,353 47,669 (A) The percentage forfeited in the year represents the reduction from the maximum number of performance rights available to vest due to the performance hurdles not being achieved or due to the resignation of the executive. (B) The minimum value of performance rights yet to vest is nil as the executives may not achieve the required performance hurdles or may terminate their employment prior to vesting. (C) The maximum values presented above are based on the values calculated using the Black‑Scholes methodology as applied in estimating the value of performance rights for employee benefit expense purposes. 33 Integrated Research and its controlled entities Annual Report 2018 Other Transactions with Key Management Personnel Apart from the details disclosed in this note, no director has entered into a material contract with the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year‑end. Equity instruments All performance rights refer to performance rights over ordinary shares of Integrated Research Limited, which are exercisable on a one‑for‑one basis under the Integrated Research Performance Rights and Option Plan (IRPROP). Performance rights over equity instruments granted as compensation The movement during the reporting year in the number of performance rights over ordinary shares in Integrated Research Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2017 Granted as compensa‑ tion Exercised Other changes* Held at 30 June 2018 Vested during the year Vested and exercised at 30 June 2018 Current Year Directors John Merakovsky ‑ 210,000 ‑ ‑ ‑ 210,000 ‑ ‑ 20,000 100,000 100,000 100,000 100,000 130,000 150,000 50,000 75,000 20,000 (100,000) 15,000 (100,000) (15,000) ‑ 100,000 100,000 20,000 (40,000) 25,000 (100,000) ‑ (50,000) 15,000 (75,000) ‑ ‑ ‑ ‑ 110,000 40,000 40,000 75,000 100,000 100,000 ‑ 50,000 50,000 15,000 75,000 75,000 Held at 1 July 2016 Granted as compensa‑ tion Exercised Other changes* Held at 30 June 2017 Vested during the year Vested and exercised at 30 June 2017 Executives Peter Adams Alex Baburin Jason Barker Andre Cuenin David Purdue Kevin Ryder Prior Year Directors Darc Rasmussen 250,000 350,000 Executives Peter Adams Alex Baburin 125,000 150,000 115,000 150,000 Jason Barker 130,000 ‑ Andre Cuenin 270,000 150,000 David Purdue Kevin Ryder 50,000 90,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (600,000) ‑ (175,000) 100,000 (165,000) 100,000 ‑ 130,000 (270,000) 150,000 ‑ 50,000 (15,000) 75,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ * Other changes represent performance rights that expired or were forfeited during the year. Performance rights expire on the earlier of their expiry date or termination of the individual’s employment. No performance rights have been granted since the end of the financial year. The performance rights were provided at no cost to the recipients. 34 Integrated Research and its controlled entities Annual Report 2018Remuneration report (audited) Movements in shares The movement during the reporting period in the number of ordinary shares in Integrated Research Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2017 Purchases Received on exercise of perfor‑ mance rights Other changes* Sales Held at 30 June 2018 Current Year Non‑executive Directors Nick Abrahams Paul Brandling Garry Dinnie Steve Killelea Peter Lloyd Executive officers (excluding directors) Peter Adams Alex Baburin Andre Cuenin David Purdue Kevin Ryder Prior Year Non‑executive Directors Nick Abrahams Alan Baxter Paul Brandling Garry Dinnie Steve Killelea Peter Lloyd Executive Directors Darc Rasmussen Executive officers (excluding directors) Peter Adams Alex Baburin Andre Cuenin David Purdue ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 100,000 100,000 100,000 50,000 75,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,042 10,202 2,000 (21,641,720) 68,193,231 ‑ 2,000 (105,000) 10,000 (25,600) (102,200) ‑ ‑ ‑ (150,000) (25,000) (40,000) ‑ ‑ 78,250 35,000 Held at 30 June 2017 Received on exercise of options Purchases Other changes* Sales 5,042 10,202 2,000 89,834,951 2,000 15,000 27,800 50,000 53,250 ‑ Held at 1 July 2016 2,000 197,000 10,202 3,042 ‑ ‑ ‑ 2,000 89,834,951 ‑ ‑ 2,000 335,624 20,000 40,000 50,000 53,250 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (197,000) ‑ ‑ ‑ ‑ (335,624) ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,042 ‑ 10,202 2,000 89,834,951 2,000 ‑ ‑ ‑ ‑ ‑ (5,000) (12,000) ‑ ‑ 15,000 27,800 50,000 53,250 * Other changes represent net movement post ceasing to hold office. Shareholdings at the date of the Directors’ Report for existing Key Management Personnel remain unchanged. Other transactions with the consolidated entity There were no other transactions between the key management personnel, or their personally‑related entities, and the consolidated entity. 35 Integrated Research and its controlled entities Annual Report 2018 3636 Integrated Research and its controlled entities Annual Report 2018 Integrated Research and its controlled entities Annual Report 2018Corporate Governance Corporate Governance Statement Contents 38 Board of directors and its committees 41 Risk management 42 Ethical standards 43 Communication with shareholders Integrated Research and its controlled entities Annual Report 2018 37 37 Integrated Research and its controlled entities Annual Report 2018 This statement outlines the main corporate governance practices that were in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated. The agenda for its meetings is prepared in conjunction with the chairman, chief executive officer and company secretary. Standing items include strategic matters for discussion, the CEO’s report, financial reports, key performance indicator reports and presentations by key executives and external industry experts. Board papers are circulated in advance. Directors have other opportunities, including visits to operations, for contact with a wider group of employees. Director education The consolidated entity follows an induction process to educate new directors about the nature of the business, current issues, the corporate strategy and expectations of the consolidated entity concerning performance of directors. In addition executives make regular presentations to the board to ensure its familiarity with operational matters. Directors are expected to access external continuing education opportunities to update and enhance their skills and knowledge. Independent advice and access to company information Each director has the right of access to all relevant company information and to the company’s executives and, subject to prior consultation with the chairman, may seek independent professional advice from a suitably qualified adviser at the consolidated entity’s expense. A copy of the advice received by the director is made available to all other members of the board. Board of directors and its committees Role of the board The board’s primary role is the protection and enhancement of long‑term shareholder value. To fulfil this role, the board is responsible for the overall corporate governance of the consolidated entity including evaluating and approving its strategic direction, approving and monitoring capital expenditure, setting remuneration, appointing, removing and creating succession policies for directors and senior executives, establishing and monitoring the achievement of management goals and assessing the integrity of internal control and management information systems. It is also responsible for approving and monitoring financial and other reporting. Board process To assist in the execution of its responsibilities, the Board has established a number of board committees including a Nomination and Remuneration Committee, an Audit and Risk Committee and a Strategy Committee. These committees have written mandates and operating procedures, which are reviewed on a regular basis. The board has also established a framework for the management of the consolidated entity including board‑endorsed policies, a system of internal control, a business risk management process and the establishment of appropriate ethical standards. The full board currently holds twelve scheduled meetings each year and any extraordinary meetings at such other times as may be necessary to address any specific matters that may arise. 38 Integrated Research and its controlled entities Annual Report 2018Corporate Governance Composition of the board The names of the directors of the company in office at the date of this report are set out on pages 20 to 21 of this report. The company’s constitution provides for the board to consist of between three and twelve members. At 30 June 2018 the board members were comprised as follows: • Mr Steve Killelea ‑ Non Executive Director (Chairman) • Mr Nick Abrahams ‑ Non‑Executive Director • Mr Paul Brandling‑ Independent Non Executive Director • Mr Garry Dinnie ‑ Independent Non Executive Director • Mr Peter Lloyd ‑ Non Executive Director • Mr John Merakovsky ‑ Chief Executive Officer The election of Mr Killelea, who holds a majority of the company’s issued shares, as non‑executive chairman, does not comply with the ASX Corporate Governance Council recommendation that the chairman be an independent director. However, the board is satisfied that the company benefits from Mr Killelea’s experience and knowledge gained through his long involvement with Integrated Research and his associations throughout the information technology industry. Mr Killelea founded Integrated Research in 1988 and was the CEO and managing director of the company until his retirement in November 2004. Mr Abrahams was appointed as a Non‑Executive Director in September 2014. While there are good arguments that Mr Abrahams is in fact independent, he has been classified as not independent due to a pre‑existing business relationship between Mr Abrahams and Mr Killelea. The board is satisfied that the company benefits from Mr Abrahams’ experience and knowledge gained through his more than 20 year career as a lawyer assisting technology companies in Australia and overseas. At each Annual General Meeting one‑third of directors, any director who has held office for three years and any director appointed by directors in the preceding year must retire, then being eligible for re‑election. The CEO is not required to retire by rotation. The composition of the board is reviewed on a regular basis to ensure that the board has the appropriate mix of expertise and experience. When a vacancy exists, through whatever cause, or where it is considered that the board would benefit from the services of a new director with particular skills, the Nomination and Remuneration Committee, in conjunction with the board, determines the selection criteria for the position based on the skills deemed necessary for the board to best carry out its responsibilities. The committee then selects a panel of candidates and the board appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. The composition of the board during the year ended 30 June 2018 did not comply with the ASX Corporate Governance Council recommendation that the majority of the board should be independent directors. The Company recently appointed an additional independent non‑executive Director (Ms Anne Myers) in July 2018. Peter Lloyd is deemed independent commencing July 2018 at which time the company will be compliant with the recommendation. The company secretary is accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. Nomination and Remuneration Committee The Nomination and Remuneration Committee has a documented charter, approved by the board. The Nomination and Remuneration Committee is a committee of the board of directors and is empowered by the board to assist it in fulfilling its duties to shareholders and other stakeholders. In general, the committee has responsibility to: 1) ensure the company has appropriate remuneration policies designed to meet the needs of the company and to enhance corporate and individual performance and 2) review board performance, select and recommend new directors to the board and implement actions for the retirement and re‑election of directors. Responsibilities Regarding Remuneration The Committee reviews and makes recommendations to the board on: • The appointment, remuneration, performance objectives and evaluation of the chief executive officer. • The remuneration packages for senior executives. • The Company’s recruitment, retention and termination policies and procedures for senior executives. • Executive remuneration and incentive policies. • Policies on employee incentive plans, including equity incentive plans. • Superannuation arrangements. • The remuneration framework and policy for non‑executive directors. • Remuneration levels are competitively set to attract and retain the most qualified and experienced directors and senior executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies and industry surveys. Remuneration packages include a mix of fixed remuneration, performance‑based remuneration and equity‑based remuneration. 39 Integrated Research and its controlled entities Annual Report 2018 Responsibilities Regarding Nomination The Committee develops and makes recommendations to the board on: • The CEO and senior executive succession planning. • The range of skills, experience and expertise needed on the board and the identification of the particular skills, experience and expertise that will best complement board effectiveness. • A plan for identifying, reviewing, assessing and enhancing director competencies. • Board succession plans to maintain a balance of skills, experience and expertise on the board. • Evaluation of the board’s performance. • Appointment and removal of directors. • Appropriate composition of committees. The terms and conditions of the appointment of non‑executive directors are set out in a letter of appointment, including expectations for attendance and preparation for all board meetings, expected time commitments, procedures when dealing with conflicts of interest, and the availability of independent professional advice. The performance of the Chief Executive Officer and the board was undertaken in the reporting period identifying both strengths and development actions. The performance of other senior management was conducted by the Chief Executive Officer. The members of the Nomination and Remuneration Committee during the year were: • Mr Garry Dinnie ‑ Independent Non‑Executive Director (Chairman) • Mr Steve Killelea ‑ Non‑Executive The company does not comply with the ASX Corporate Governance Council recommendation that the committee consist of three members, a majority of whom should be independent directors. During this period of non‑compliance, the Company utilised the skills and experience of the other independent and non‑executive Directors of the Board. The recent addition of another non‑executive Director in July 2018 should enable the company to move toward compliance. A matrix of skills and diversity of the board as required by the ASX corporate governance recommendations is available on the Company’s website at www.ir.com. The Nomination and Remuneration Committee meets at least twice a year and as required. The Committee met three times during the year under review. Audit and Risk Committee The Audit and Risk Committee has a documented charter, approved by the board. The charter states that all members must be non‑executive directors with a majority being independent. The chairman may not be the chairman of the board. The committee advises on the establishment and maintenance of a framework of risk management and internal control of the consolidated entity. The members of the Audit and Risk Committee during the year were: • Mr Nick Abrahams ‑ Non‑Executive Director • Mr Garry Dinnie ‑ Independent Non‑Executive (Chairman) • Mr Paul Brandling ‑ Independent Non Executive Director During the year, the Audit and Risk Committee provided the Board with updates to the Company’s risk management register (with the Board approving this document). The external auditor, Chief Executive Officer and Chief Financial Officer are invited to Audit and Risk Committee meetings at the discretion of the committee. The committee met four times during the year and committee members’ attendance record is disclosed in the table of directors’ meetings on page 24. The external auditor met with the audit committee/board four times during the year, two of which included time without the presence of executive management. The Chief Executive Officer and the Chief Financial Officer declared in writing to the board that the company’s financial reports for the year ended 30 June 2018 comply with accounting standards and present a true and fair view, in all material respects, of the company’s financial condition and operational results. The main responsibilities of the Audit and Risk Committee as set out in the charter include: • Serve as an independent party to monitor the financial reporting process and internal control systems. • Review the performance and independence of the external auditors and make recommendations to the board regarding the appointment or termination of the auditors. • Review the scope and cost of the annual audit, negotiating and recommending the fee for the annual audit to the board. • Review the external auditor’s management letter and responses by management. • Provide an avenue of communication between the auditors, management and the board. • Monitor compliance with all financial statutory requirements and regulations. 40 Integrated Research and its controlled entities Annual Report 2018Corporate Governance • Review financial reports and other financial information distributed to shareholders so that they provide an accurate reflection of the financial health of the company. • Monitor corporate risk management and assessment processes, and the identification and management of strategic and operational risks. • Enquire of the auditors of any difficulties encountered during the audit, including any restrictions on the scope of their work, access to information or changes to the planned scope of the audit. The Audit and Risk Committee reviews the performance of the external auditors on an annual basis and normally meets with them during the year as follows: • To discuss the external audit plans, identifying any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements and to review the fees proposed for the audit work to be performed. Prior to announcement of results: • To review the half‑year and preliminary final report prior to lodgement with the ASX, and any significant adjustments required as a result of the auditor’s findings. • To recommend the Board approval of these documents. • Review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made. To finalise half‑year and annual reporting: • Review the draft financial report and recommend board approval of the financial report. • As required, to organise, review and report on any special reviews or investigations deemed necessary by the board. Risk management Under the Audit and Risk Charter, the Audit and Risk Committee reviews the status of business risks to the consolidated entity through integrated risk management programs ensuring risks are identified, assessed and appropriately managed and communicated to the board. Major business risks arise from such matters as actions by competitors, government policy changes and the impact of exchange rate movements. Comprehensive policies and procedures are established such that: • Capital expenditure above a certain size requires board approval. • Financial exposures are controlled, including the use of forward exchange contracts. • Risks are identified and managed, including internal audit, privacy, insurances, business continuity and compliance. • Business transactions are properly authorised and executed. The Chief Executive Officer and the Chief Financial Officer has declared, in writing to the board that the Company’s financial reports are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board. Strategy Committee The Strategy Committee has a documented charter, approved by the board and is responsible for reviewing strategy and recommending strategies to the board to enhance the company’s long‑term performance. The committee is comprised of at least three members, including the chairman of the board and the Chief Executive Officer. The board appoints a member of the committee to be chairman. The members of the Strategy Committee during the year were: • Mr Steve Killelea (Chairman) ‑ Non‑Executive • Mr John Merakovsky ‑ Chief Executive Officer • Mr Peter Lloyd ‑ Non‑Executive • Mr Paul Brandling‑ Independent Non‑Executive The Strategy Committee is responsible for: • Reviewing and assisting in defining current strategy. • Assessing new strategic opportunities, including M&A proposals and intellectual property developments or acquisitions. • Staying close to the business challenges and monitor operational implementation of strategic plans. • Endorsing strategy and business cases for consideration by the full board. The Committee met four times during the year under review. 41 Integrated Research and its controlled entities Annual Report 2018 Internal control framework The board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The board has instigated the following internal control framework: • Financial reporting ‑ Monthly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared monthly. • Continuous disclosure ‑ Identify matters that may have a material effect on the price of the Company’s securities, notify them to the ASX and post them to the Company’s website. • Quality and integrity of personnel ‑ Formal appraisals are conducted at least annually for all employees. • Investment appraisals ‑ Guidelines for capital expenditure include annual budgets, detailed appraisal and review procedures and levels of authority. Internal Audit The Company does not have an internal audit function but utilises its financial resources as needed to assist the board in ensuring compliance with internal controls. Material Exposure to economic, environmental and social sustainability risks By the nature of the industry that the Company participates in, exposures to economic, environmental and social sustainability risks are not considered material. Ethical standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the consolidated entity. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. Conflict of interest Each Director must keep the board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the board considers that a significant conflict exists the director concerned does not receive the relevant board papers and is not present at the meeting whilst the item is considered. The board has developed procedures to assist directors to disclose potential conflicts of interest. Details of director related entity transactions with the consolidated entity are set out in Remuneration report page 27 to 35. Code of conduct The consolidated entity has advised each director, manager and employee that they must comply with the code of conduct. The code aligns behaviour of the board and management with the code of conduct by maintaining appropriate core values and objectives. It may be reviewed on the company’s website and includes: • Responsibility to the community and fellow employees to act with honesty and integrity, and without prejudice. • Compliance with laws and regulations in all areas where the company operates, including employment opportunity, occupational health and safety, trade practices, fair dealing, privacy, drugs and alcohol, and the environment. • Dealing honestly with customers, suppliers and consultants. • Ensuring reports and other information are accurate and timely. • Proper use of company resources, avoidance of conflicts of interest and use of confidential or proprietary information. Equal Employment Opportunity The Company has a policy on Equal Employment Opportunity with the provision that commits to a workplace that is free of discrimination of all types. It is Company policy to hire, develop and promote individuals solely on the basis of merit and their ability to perform without prejudice to race, colour, creed, national origin, religion, gender, age, disability, sexual orientation, marital status, membership or non‑membership of a trade union, status of employment (whether full or part‑time) or any other factors prohibited by law. The board is satisfied that the Equal Employment Opportunity policy is sufficient without the need to further establish a separate policy on gender diversity as required by the ASX Corporate Governance Council recommendation. Trading in company securities by directors and employees Directors and employees may acquire shares in the company, but are prohibited from dealing in company shares whilst in possession of price sensitive information, and except in the periods: • • From 24 hours to 42 days after the release of the company’s half‑yearly results announcement. From 24 hours to 56 days after release of the company’s annual results announcement. • Directors must obtain the approval of the Chairman of the board and notify the Company Secretary before they buy or sell shares in the company, subject to board veto. The company advises the ASX of any transactions conducted by directors in shares in the company. Participants in the Company’s Performance Rights program are specifically prohibited to hedge the exposure to the Integrated Research share price during the vesting period in respect of the unvested performance rights. 42 Integrated Research and its controlled entities Annual Report 2018Corporate Governance Communication with shareholders The board provides shareholders with information using a comprehensive continuous disclosure policy which includes identifying matters that may have a material effect on the price of the company’s securities, notifying them to the ASX, posting them on the Company’s website (www.ir.com), and issuing media releases. Disclosures under this policy are in addition to the periodic and other disclosures required under the ASX Listing Rules and the Corporations Act. More details of the policy are available on the Company’s website. The Chief Executive Officer and the Chief Financial Officer are responsible for interpreting the Company’s policy and where necessary informing the board. The Company Secretary is responsible for all communication with the ASX. The board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. Important issues are presented to the shareholders as single resolutions. The external auditor is requested to attend the Annual General Meetings to answer any questions concerning the audit and the content of the auditor’s report. The shareholders are requested to vote on the appointment and aggregate remuneration of directors, the granting of options and shares to directors, the Remuneration Report and changes to the Constitution. Copies of the Constitution are available to any shareholder who requests it. 43 Integrated Research and its controlled entities Annual Report 2018 4444 Integrated Research and its controlled entities Annual Report 2018 Integrated Research and its controlled entities Annual Report 2018Financial Statements Financials Contents 46 Consolidated statement of comprehensive income 47 Consolidated statement of financial position 48 Consolidated statement of changes in equity 49 Consolidated statement of cash flows 50 Notes to the financial statements 50 Note 1: Significant accounting policies 58 Note 2: Segment reporting 59 Note 3: Expenditure 59 Note 4: Other gains and (losses) 59 Note 5: Finance income 60 Note 6: Auditors’ remuneration 60 Note 7: Income tax expense 61 Note 8: Earnings per share 61 Note 9: Cash and cash equivalents 62 Note 10: Trade and other receivables 63 Note 11: Other current assets 63 Note 12: Other financial assets 63 Note 13: Property, plant and equipment 64 Note 14: Deferred tax assets and liabilities 66 Note 15: Intangible assets 67 Note 16: Goodwill 67 Note 17: Trade and other payables 67 Note 18: Employee benefits 69 Note 19: Deferred consideration for acquisition 69 Note 20: Provisions 69 Note 21: Other liabilities 70 Note 22: Capital and reserves 72 Note 23: Financial instruments 75 Note 24: Operating leases 76 Note 25: Consolidated entities 76 Note 26: Reconciliation of cash flows from operating activities 77 Note 27: Key management personnel disclosures 77 Note 28: Related parties 77 Note 29: Parent entity disclosures 78 Note 30: Subsequent events 79 Directors’ declaration 80 Independent auditor’s report 87 ASX additional information Integrated Research and its controlled entities Annual Report 2018 45 45 Integrated Research and its controlled entities Annual Report 2018 Consolidated statement of comprehensive income For the year ended 30 June 2018 In thousands of AUD Revenue Revenue from licence fees Revenue from maintenance fees Revenue from testing solution services Revenue from consulting Total revenue Expenditure Research and development expenses Sales, consulting and marketing expenses General and administration expenses Total expenditure Other gains and (losses) Profit before finance income and tax Finance income Profit before tax Income tax expense Profit for the year Other comprehensive income Items that may be reclassified subsequently to profit Loss on cash flow hedge taken to equity Foreign exchange translation differences Other comprehensive income Consolidated Notes 2018 2017 52,591 26,010 5,207 7,367 91,175 53,441 26,871 4,073 6,784 91,169 (15,335) (14,862) (45,703) (43,605) (5,849) (6,086) (66,887) (64,553) 1,560 (908) 25,848 25,708 423 26,271 (7,091) 19,180 173 25,881 (7,361) 18,520 (176) 498 322 (20) (269) (289) 3 4 5 7 Total comprehensive income for the year 19,502 18,231 Profit attributable to: Members of Integrated Research Total comprehensive income attributable to: Members of Integrated Research 19,180 18,520 19,502 18,231 Earnings per share attributable to members of Integrated Research: Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) 8 8 11.19 11.15 10.86 10.78 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements set out on pages 50 to 78. 46 Integrated Research and its controlled entities Annual Report 2018Financial Statements Consolidated statement of financial position As at 30 June 2018 In thousands of AUD Current assets Cash and cash equivalents Trade and other receivables Current tax assets Other current assets Total current assets Non‑current assets Trade and other receivables Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Total non‑current assets Total assets Current liabilities Trade and other payables Provisions Income tax liabilities Deferred revenue Other current liabilities Total current liabilities Non‑current liabilities Deferred consideration for acquisition Deferred tax liabilities Provisions Deferred revenue Other non‑current liabilities Total non‑current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Consolidated Notes 2018 2017 9 10 11 10 12 13 14 15 17 20 21 19 14 20 21 22 22 11,238 44,186 1,037 1,792 58,253 14,113 35,998 1,156 1,860 53,127 26,892 23,299 255 2,547 687 21,938 52,319 171 1,872 1,147 19,934 46,423 110,572 99,550 10,140 3,085 1,986 9,620 2,607 4,302 22,643 20,077 329 38,183 11 36,617 ‑ 4,281 829 9,371 70 14,551 1,476 3,440 882 8,411 204 14,413 52,734 51,030 57,838 48,520 1,667 3,043 53,128 57,838 1,667 1,768 45,085 48,520 The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements set out on pages 50 to 78. 47 Integrated Research and its controlled entities Annual Report 2018 Consolidated statement of changes in equity Balance at 30 June 2018 1,667 (146) (256) 3,445 For the year ended 30 June 2018 Consolidated In thousands of AUD Balance at 1 July 2017 Profit for the year Other comprehensive income for the year (net of tax) Total comprehensive income for the year Share based payments expense Dividends to shareholders Share capital 1,667 ‑ ‑ ‑ ‑ ‑ Consolidated In thousands of AUD Balance at 1 July 2016 Profit for the year Other comprehensive income for the year (net of tax) Total comprehensive income for the year Share based payments expense Dividends to shareholders Share capital 1,667 ‑ ‑ ‑ ‑ ‑ Balance at 30 June 2017 1,667 Hedging reserve Translation reserve Employee benefit reserve Retained earnings Total (754) 2,492 45,085 48,520 30 ‑ (176) (176) ‑ ‑ 50 ‑ (20) (20) ‑ ‑ 30 ‑ 498 498 ‑ ‑ ‑ ‑ ‑ 953 ‑ Employee benefit reserve 2,161 ‑ ‑ ‑ 331 ‑ (485) ‑ (269) (269) ‑ ‑ (754) 2,492 19,180 19,180 ‑ 322 19,180 19,502 ‑ (11,137) 53,128 953 (11,137) 57,838 Retained earnings 37,653 18,520 Total 41,046 18,520 ‑ (289) 18,520 18,231 ‑ (11,088) 45,085 331 (11,088) 48,520 Hedging reserve Translation reserve The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements set out on pages 50 to 78. 48 Integrated Research and its controlled entities Annual Report 2018Financial Statements Consolidated statement of cash flows For the year ended 30 June 2018 In thousands of AUD Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Income taxes paid Net cash provided by operating activities 26 Cash flows from investing activities Payments for capitalised development Payments for property, plant and equipment Payments for intangible asset Interest received Interest paid Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Payment of dividend Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 July Effects of exchange rate changes on cash Cash and cash equivalents at 30 June 22 9 Consolidated Notes 2018 2017 82,734 88,897 (53,362) (54,983) 29,372 (7,930) 21,442 33,914 (7,752) 26,162 (11,524) (8,588) (1,158) (803) (27) 518 (95) (80) 289 (116) (12,286) (9,298) 4,500 (4,500) (11,137) (11,137) (1,981) 14,113 (894) 11,238 6,250 (6,250) (11,088) (11,088) 5,776 8,544 (207) 14,113 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 50 to 78. 49 Integrated Research and its controlled entities Annual Report 2018 The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. New accounting standards and Interpretations The Company has applied the following standards and amendments for the first time for the annual reporting period commencing 1 July 2017 and have not had any material effect on its financial position or performance: AASB 2016‑1 ‘Amendments to Australian Accounting Standards ‑ Recognition of Deferred Tax Assets for Unrealised Losses’ AASB 2016‑2 ‘Amendments to Australian Accounting Standards ‑ Disclosure Initiative: Amendments to AASB 107’ Note 1: Significant accounting policies Integrated Research Limited (the “Company”) is a company domiciled in Australia. The financial report of the Company for the year ended 30 June 2018 comprises the Company and its subsidiaries (together referred to as the “consolidated entity”). The financial report was authorised for issue by the directors on 16 August 2018. Integrated Research is a for‑profit Company limited by ordinary shares. a) Statement of Compliance The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards and Interpretations and the Corporations Act 2001. Financial statements of the consolidated entity comply with International Financial Reporting Standards and interpretations adopted by the International Accounting Standards Board. b) Basis of Preparation The financial statements are presented in Australian dollars and are prepared on the historical cost basis, with the exception of derivatives, which are at fair value. The company is of a kind referred to in ASIC Legislative Instrument 2016/191 and in accordance with that Class Order, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. The preparation of financial statements in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Notes to the Financial Statements For the year ended 30 June 2018 50 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 1: Significant accounting policies (cont.) Standards and Interpretations issued not yet effective At the date of authorisation of the financial report, a number of standards and Interpretations were in issue but not yet effective. Initial application of the following Standards is not expected to materially affect any of the amounts recognised in the financial statements, but may change the disclosures presently made in relation to the consolidated entity’s financial statements: Standard/Interpretation AASB 2016‑5 Amendments to Australian Accounting Standards ‑ Classification and Measurement of Share‑based Payment Transactions AASB 2017‑1 Amendments to Australian Accounting Standards ‑ Transfers of Investments Property, Annual Improvements 2014‑2016 Cycle and Other Amendments AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration AASB 2017‑6 Amendments to Australian Accounting Standards ‑ Prepayment Features with Negative Compensation AASB 2018‑1 Amendments to Australian Accounting Standards ‑ Annual Improvements 2015‑2017 Cycle AASB 2018‑2 Amendments to Australian Accounting Standards ‑ Plan Amendment, Curtailment or Settlement AASB Interpretation 23 Uncertainty over Income Tax Treatments, and relevant amending standards Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 Jan 2018 30 June 2019 1 Jan 2018 30 June 2019 1 Jan 2018 30 June 2019 1 Jan 2019 30 June 2020 1 Jan 2019 30 June 2020 1 Jan 2019 30 June 2020 1 Jan 2019 30 June 2020 51 Integrated Research and its controlled entities Annual Report 2018 Note 1: Significant accounting policies (cont.) Initial application of the following Standards is likely to impact the amounts recognised in the future financial statements. AASB15 ‘Revenue from Contracts with Customers’ The standard is applicable to the financial year ended 30 June 2019 and has superseded all current revenue recognition requirements under Australian Accounting Standards. The Company will apply the modified retrospective method in adopting the new standard, resulting in the recognition of transition adjustments on adoption. The Company has materially assessed the impact of adopting AASB 15 and the indicative transition adjustments as follows: • There are no material transition adjustments required for revenue arising from historic contracts with customers; • There is a transition adjustment required in relation to the incremental costs of obtaining a contract. The transition adjustment arises from the Company remunerating employees who actively participate in the sales process with commissions calculated based on revenues where they have been involved in the successful contract execution. This typically includes revenues which will be recognised in subsequent financial reporting periods. Under the current accounting policy, commissions related to sales are recognised as an expense on contract execution, which is the point at which a constructive obligation arises for the Company. Under AASB 15, these costs will be recognised as an asset on contract execution with the amortisation period being consistent with the period over which the associated revenue will be recognised. For the 30 June 2019 financial year the transition adjustment as at 1 July 2018 is expected to be an increase of no more than $2 million to the Company’s assets. 52 AASB9 ‘Financial Instruments’ c) Basis of consolidation The standard is applicable to the financial year ended 30 June 2019. AASB 9 will replace the requirements of AASB 139 Financial Instruments: Recognition and Measurement and bring together the classification, measurement, impairment and hedge accounting requirements for financial instruments. The Company is continuing to assess any possible impacts of adopting the standard and at this point does not expect a transition adjustment as at 1 July 2018. AASB16 ‘Leases’ The standard is applicable to the financial year ended 30 June 2020. It introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee will recognise a right‑of‑use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Depreciation of the asset and interest on the liability will be recognised. This standard will impact the Company’s financial position at transition and in future years, as the Company’s operating leases (primarily in relation to its offices) are recognised on balance sheet. The standard is not expected to materially impact the Company’s opening retained earnings as at 1 July 2019. Rental expense currently recognised in the consolidated statement of comprehensive income will be replaced with depreciation and interest. The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements. Subsidiaries are entities controlled by the Company. Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if and only if the Company has power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee). Exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect its returns. When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee including: the contractual arrangement with the other vote holders of the investee; rights arising from other contractual arrangements and the Company’s voting rights and potential voting rights. The Company re‑assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Company gains control until the date the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Company and to the non‑controlling interests, even if this results in the non‑controlling interests having a deficit balance. Integrated Research and its controlled entities Annual Report 2018Financial Statements A fair value measurement of a non‑financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as whole: Level 1 ‑ Quoted (unadjusted) market prices in active markets for identical assets or liabilities. Level 2 ‑ Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3 ‑ Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re‑assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Note 1: Significant accounting policies (cont.) c) Basis of consolidation (cont.) When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Company’s accounting policies. All intra‑group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Company are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it: de‑recognises the assets (including goodwill) and liabilities of the subsidiary; de‑recognises the carrying amount of any non‑controlling interests; de‑recognises the cumulative translation differences recorded in equity; recognises the fair value of the consideration received; recognises the fair value of any investment retained; recognises any surplus or deficit in profit or loss; reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Company had directly disposed of the related assets or liabilities. d) Foreign currency In preparing the financial statements of the individual entities transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year‑end date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss. Non‑monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non‑monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. On consolidation, the assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation are translated to Australian dollars at foreign exchange rates ruling at the year end date. The revenues and expenses of foreign operations, are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in other comprehensive income and accumulated in the translation reserve. e) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: i) ii) in the principal market for the assets or liability; or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. 53 Integrated Research and its controlled entities Annual Report 2018 Note 1: Significant accounting policies (cont.) f) Derivative financial instruments The consolidated entity uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational activities. In accordance with its treasury policy, the consolidated entity does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. The fair value of forward exchange contracts is their quoted market price at the year end date, being the present value of the quoted forward price. g) Hedging On entering into a hedging relationship, the consolidated entity normally designates and documents the hedge relationship and risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated. For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in profit or loss in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the profit or loss. h) Property, plant and equipment Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses (see accounting policy (l)). The cost of acquired assets includes (i) the initial estimate at the time of installation and during the period of use, when relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and (ii) changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outflow of resources required to settle the obligation or from changes in the discount rate. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is provided on property, plant and equipment. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed annually, with the effect of any changes recognised on a prospective basis. The following useful lives are used in the calculation of depreciation: • Leasehold improvements 6 to 10 years • Plant and equipment 4 to 8 years i) Intangible Assets Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the consolidated entity has sufficient resources to complete development. The useful lives of the capitalised assets are assessed as finite. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in profit or loss as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see accounting policy (l)). Amortisation is charged to profit or loss on a straight‑line basis over the estimated useful life, but no more than three years. Intellectual property Intellectual property acquired from third parties is amortised over its estimated useful life, but no more than three years. Computer software Computer software is stated at cost and amortised on a straight‑line basis over a 2½ to 3 year period. Customer Relationships Customer relationships are initially measured at fair value and amortised over the estimated useful life, but no more than five years. 54 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 1: Significant accounting policies (cont.) j) Trade and other receivables Trade and other receivables are stated at their amortised cost less impairment losses. The carrying amount of uncollectible trade receivables is reduced by an impairment loss through the use of an allowance account. For the trade receivables with extended payment terms beyond twelve months, the receivable is initially recognised at fair value calculated by applying a discount to the contracted cash flows. The discount rate applied is based upon the corporate borrowing rate that would apply to the type of customer, taking into account the customers’ credit worthiness based on its size and jurisdiction. k) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits with an original maturity of three months or less. l) Impairment The carrying amounts of the consolidated entity’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Refer to Note 1 (u) for Goodwill impairment considerations. For intangible assets that are not yet available for use, the recoverable amount is estimated at each year end date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through profit or loss. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‑tax discount rate that reflects current market assessments of the time value of money and their risk specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash‑generating unit to which the asset belongs. m) Employee benefits Superannuation Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss as incurred. There are no defined benefit plans in operation. Long‑term service benefits The consolidated entity’s net obligation in respect of long‑term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on‑costs and expected settlement dates, and is discounted using the rates attached to the high quality corporate bond rate at the year end date which have maturity dates approximating to the terms of the consolidated entity’s obligations. Share‑based payment transactions The performance rights programmes allow the consolidated entity’s employees to acquire shares of the Company. The fair value of performance rights granted are recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the performance rights. The fair value of the instrument granted is measured using a Black‑Scholes methodology, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options or performance rights that are expected to vest. Wages, salaries, annual leave, and non‑monetary benefits Liabilities for employee benefits for wages, salaries and annual leave represent present obligations resulting from employees’ services provided to the year end date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at the year end date. n) Provisions A provision is recognised in the statement of financial position when the consolidated entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre‑tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Employee benefits Provisions for employee benefits include liabilities for annual leave and long service leave and are measured at the amounts expected to be paid when the liabilities are settled. Make good The make good provision is for leases undertaken by the Company. For each provision raised a corresponding asset has been recognised and is amortised over the shorter of the term of the lease or the useful life of the asset. 55 Integrated Research and its controlled entities Annual Report 2018 Note 1: Significant accounting policies (cont.) o) Trade and other payables Trade and other payables are stated at their amortised cost. p) Revenue q) Expenses Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight‑line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense and spread over the lease term. The consolidated entity allocates revenue to each element in software arrangements involving multiple elements based on the relative fair value of each element. The typical elements in the multiple element arrangement are licence and maintenance fees. The company’s determination of fair value is generally based on the price charged when the same element is sold separately. Revenue from the sale of licences, where the consolidated entity has no post delivery obligations to perform is recognised in profit or loss at the date of delivery of the licence key. Revenue from maintenance contracts is recognised rateably over the term of the service agreement, which is typically one year. Maintenance contracts are typically priced based on a percentage of licence fees. Services provided to customers under maintenance contracts include technical support and supply of software updates. Revenue from testing solutions services is recognised over the period the services are provided. Revenue from consulting services is recognised over the period the services are provided. No revenue is recognised if there are significant uncertainties regarding the recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return of goods or there is continuing management involvement with the goods. r) Financing income Financing income comprises interest receivable on funds invested. the financing component of the sale of licences and interest payable on borrowings. s) Income tax Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the year end date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the year end date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional dividend franking deficit tax that arises from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. t) Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), or similar taxes, except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable or payable is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities, which are recoverable or payable are classified as operating cash flows. u) Business Combination and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred at acquisition date measured at fair value. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Changes in the fair value of the contingent consideration are recognised in the Statement of Comprehensive Income. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed. Goodwill is tested annually for impairment. Acquisition‑related costs are expensed as incurred and included in administrative expenses. 56 Integrated Research and its controlled entities Annual Report 2018Financial Statements Intangible assets ‑ Goodwill Goodwill acquired from business acquisitions is initially measured at cost. Goodwill is tested annually for impairment or earlier if changes in circumstances indicate a potential impairment, the impairment policy is explained in note 1(l). The impairment testing requires judgements over future cashflow streams and assumptions used in the calculations. Share based payment transactions The consolidated entity measures the cost of equity‑settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using a Black‑Scholes methodology and applying management determined probability factors relating to non‑market vesting conditions. Receivables The consolidated entity assesses impairment of receivables based on objective evidence for significant receivables and by placing non‑significant receivables in portfolios of similar risk profiles, based on objective evidence from historical experience adjusted for any effects of conditions existing at each reporting date. This assessment includes judgements and estimates of future outcomes the actual results of which may differ from the estimates at the reporting date. Note 1: Significant accounting policies (cont.) v) Significant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Intangible assets ‑ Development An intangible asset arising from development expenditure on an internal project is recognised only when the consolidated entity can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefits from the related project commencing from the commercial release of the project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impairment arises during the reporting period. 57 Integrated Research and its controlled entities Annual Report 2018 Note 2. Segment reporting The Chief Operating Decision Maker (CODM), being the Chief Executive Officer, reviews a variety of information on the performance of Prognosis across the group for the purpose of resource allocation. The CODM monitors profit at a group level for the Prognosis group. The principal geographical regions are The Americas ‑ Operating from the United States with responsibility for the countries in North, Central and South America, Europe ‑ operating from the United Kingdom and Germany with responsibility for the countries in Europe, Asia Pacific ‑ operating from Australia and Singapore with responsibility for the countries in the rest of the world and Corporate Australia ‑ with responsibility for research and development and corporate head office functions of the Company. Inter‑segment pricing is determined on an arm’s length basis. Segment profit represents the profit earned by each segment without allocation of investment revenue and income tax expense. Information regarding these geographic segments is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies. Americas Europe Asia Pacific Corporate Australia1 Eliminations Consolidated 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 64,176 64,314 13,740 14,867 13,189 11,596 70 392 ‑ ‑ 91,175 91,169 ‑ ‑ ‑ ‑ ‑ ‑ 46,615 48,013 (46,615) (48,013) ‑ ‑ 64,176 64,314 13,740 14,867 13,189 11,596 46,685 48,405 (46,615) (48,013) 91,175 91,169 91,175 91,169 1,925 1,929 342 327 379 313 23,202 23,139 ‑ 25,848 25,708 In thousands of AUD Sales to customers outside the consolidated entity Inter‑segment revenue Total segment revenue Total revenue Segment results (before finance income and tax) Results from operating activities Financing income Income tax expense Profit for the year 25,848 25,708 423 173 (7,091) (7,361) 19,180 18,520 1,563 883 10,582 11,299 ‑ ‑ ‑ ‑ Capital additions2 273 96 105 94 81 17 1,104 676 Depreciation and amortisation expenditure 443 475 90 70 44 9 10,005 10,745 Americas (USD) Europe (GBP) In local currency3 2018 2017 2018 2017 Sales to customers outside the consolidated entity 49,519 48,207 7,849 8,752 Inter‑segment sales ‑ ‑ ‑ ‑ Total segment revenue 49,519 48,207 7,849 8,752 Segment results 1,485 1,446 196 219 1 Corporate Australia includes both the research and development, hedging and corporate head office functions of Integrated Research Limited. 2 Excludes internal development costs capitalised but includes third party assets acquired. Additions also include assets acquired through the purchase of businesses. 3 Segment results represented in local currencies. 58 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 3. Expenditure Total expenditure includes: In thousands of AUD Employee benefits expense: Defined contribution plans Equity settled share‑based payments Other employee benefits Depreciation and amortisation Bad and doubtful debt expense Operating lease rental expenses Note 4. Other gains and (losses) In thousands of AUD Writeback of deferred consideration for acquisition Loss on sale of financial assets Currency exchange gains/(losses) Note 19 24 Consolidated 2018 2017 2,414 950 46,556 49,920 10,582 350 2,102 Consolidated 2018 1,496 (738) 802 1,560 1,998 363 41,904 44,265 11,299 527 1,930 2017 528 (676) (760) (908) At 30 June 2018, the Company revised the fair value of the deferred consideration liability to nil resulting in a credit to profit of $1,496,000, which is inclusive of $20,000 in foreign exchange gains on translation. The write‑back reflects the fair value of the deferred consideration based on the current year actual results for the 2018 financial year. The deferred consideration was based upon IQ Services achieving EBITDA milestones over the three years between 1 July 2015 and 30 June 2018. There were catch‑up mechanisms over the three year period with the potential final payment ranging between nil and $3.5 million which were not met. Note 5. Finance income In thousands of AUD Interest income Interest on borrowings Consolidated 2018 518 (95) 423 2017 289 (116) 173 59 Integrated Research and its controlled entities Annual Report 2018 Note 6. Auditors’ remuneration In AUD Remuneration for audit and review of the financial reports of the Company or any entity in the consolidated entity: Audit and review of financial reports: Auditors of the Company Other auditors Remuneration for other services by the auditors of the Company or any entity in the consolidated entity: Taxation services: Auditors of the Company Note 7. Income tax expense Recognised in profit for the year In thousands of AUD Current tax expense: Current year Prior year adjustments Deferred tax expense: Origination and reversal of temporary differences 14 Total income tax expense in profit and loss Numerical reconciliation between income tax expense and profit before tax In thousands of AUD Profit before tax Income tax using the domestic corporate tax rate of 30% Increase in income tax expense due to: Non‑deductible expenses Effect of tax rates in foreign jurisdictions Other Prior year adjustments Decrease in income tax expense due to: R&D tax incentive Write‑back of deferred consideration for acquisition Income tax expense 60 Consolidated Note 2018 2017 Consolidated 2018 2017 275,080 ‑ 211,250 24,926 114,451 130,926 8,636 (244) 8,392 (1,301) 7,091 Consolidated 2018 26,271 7,881 303 321 214 (244) (901) (483) 7,091 6,915 315 7,230 131 7,361 2017 25,881 7,768 250 201 (126) 315 (855) (192) 7,361 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 8. Earnings per share The calculation of basic and diluted earnings per share at 30 June 2018 was based on the profit attributable to ordinary shareholders of $19,180,000 (2017: $18,520,000); a weighted number of ordinary shares outstanding during the year ended 30 June 2018 of 171,436,022 (2017: 170,550,871); and a weighted number of ordinary shares (diluted) outstanding during the year ended 30 June 2018 of 172,067,466 (2017: 171,755,729), calculated as follows: In thousands of AUD Profit for the year Weighted average number of shares used as the denominator Number Number for basic earnings per share: Ordinary shares Effect of employee share plans on issue Number for diluted earnings per share Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) Note 9. Cash and cash equivalents In thousands of AUD Cash at bank and on hand Consolidated 2018 19,180 2017 18,520 Consolidated 2018 2017 171,436,022 170,550,871 631,444 1,204,858 172,067,466 171,755,729 11.19 11.15 10.86 10.78 Consolidated 2018 11,238 2017 14,113 61 Integrated Research and its controlled entities Annual Report 2018 Note 10. Trade and other receivables Current In thousands of AUD Trade debtors Less: Allowance for doubtful debts GST receivable Non‑current In thousands of AUD Trade debtors Consolidated 2018 45,374 (1,346) 44,028 158 44,186 2017 37,234 (1,454) 35,780 218 35,998 Consolidated 2018 26,892 2017 23,299 The Company provides customers of good credit worthiness extended payment plans over the committed term of the licence contract ranging between one to five years. For customers not on extended payment plans the credit period on sales range from 30 to 90 days. Ageing of past due but not impaired: Consolidated In thousands of AUD Past due 30 days Past due 60 days Past due 90 days Total 2018 2,292 1,594 903 4,789 The movement in the allowance for doubtful debts in respect of trade receivables is detailed below: In thousands of AUD Balance at beginning of year Amounts written off during the year (Decrease)/increase in provision Balance end of year Consolidated 2018 1,454 (458) 350 1,346 2017 1,988 305 244 2,537 2017 1,860 (933) 527 1,454 The Company has used the following criteria to assess the allowance loss for trade receivables shown above: • • • • historical bad debt experience; the general economic conditions; an individual account by account specific risk assessment based on past credit history; and any prior knowledge of debtor insolvency or other credit risk. Included in the Company’s trade receivable balance are debtors which are 90 days past due at the reporting date which the Company has not provided for as there has been no significant change in credit quality and the consolidated entity believes that the amounts are still recoverable. The Company does not hold any collateral over these balances. 62 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 11. Other current assets In thousands of AUD Other prepayments Fair value of hedge asset ‑ forward foreign exchange contracts Note 12. Other financial assets In thousands of AUD Deposits Consolidated 2018 1,783 9 1,792 2017 1,763 97 1,860 Consolidated 2018 255 2017 171 The carrying amount of other financial assets is a reasonable approximation of their fair value. Note 13. Property, plant and equipment Plant and Equipment In thousands of AUD At cost Accumulated depreciation Leasehold Improvements In thousands of AUD At cost Accumulated depreciation Consolidated 2018 5,325 (3,672) 1,653 Consolidated 2018 3,292 (2,398) 894 Total property, plant and equipment Consolidated In thousands of AUD At cost Accumulated depreciation Total written down amount 2018 8,617 (6,070) 2,547 2017 4,350 (3,046) 1,304 2017 2,642 (2,073) 569 2017 6,992 (5,120) 1,872 63 Integrated Research and its controlled entities Annual Report 2018 Note 13: Property, plant and equipment (cont.) Plant and Equipment In thousands of AUD Carrying amount at start of year Additions Effects of foreign currency exchange Depreciation expense Carrying amount at end of year Leasehold Improvements In thousands of AUD Carrying amount at start of year Additions Effects of foreign currency exchange Depreciation expense Carrying amount at end of year Note 14. Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated 2018 1,304 896 22 (569) 1,653 Consolidated 2018 569 629 10 (314) 894 2017 1,308 512 (20) (496) 1,304 2017 485 290 (11) (195) 569 Consolidated In thousands of AUD Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange gain Unrealised foreign exchange loss Assets Liabilities Net 2018 ‑ 619 1,140 170 206 ‑ ‑ 2017 ‑ 321 1,260 553 77 ‑ 242 2,453 2018 5,454 2017 4,746 2018 2017 (5,454) (4,746) ‑ ‑ ‑ ‑ 275 ‑ 5,729 ‑ ‑ ‑ ‑ ‑ ‑ 619 1140 170 206 (275) ‑ 321 1,260 553 77 ‑ 242 4,746 (1,306) 3,440 (3,594) (2,293) ‑ ‑ (3,594) (2,293) Deferred tax assets/(liabilities) 2,135 Set off of deferred tax asset (1,448) (1,306) (1,448) Net deferred tax assets/(liabilities) 687 1,147 4,281 64 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 14: Deferred tax assets and liabilities (cont.) Movement in temporary differences during the year: For year ended 30 June 2018 In thousands of AUD Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange gain Unrealised foreign exchange loss For year ended 30 June 2017 In thousands of AUD Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange gain Unrealised foreign exchange loss ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Consolidated Recognised in income Recognised in equity Balance 1 July 17 (4,746) 321 1,260 553 77 ‑ 242 (708) 298 (120) (383) 129 (275) (242) (2,293) (1,301) Balance 1 July 16 (5,183) 355 1,051 774 437 ‑ 142 (2,424) Consolidated Recognised in income Recognised in equity 437 (34) 209 (221) (360) ‑ 100 131 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance 30 June 18 (5,454) 619 1,140 170 206 (275) ‑ (3,594) Balance 30 June 17 (4,746) 321 1,260 553 77 ‑ 242 (2,293) 65 Integrated Research and its controlled entities Annual Report 2018 Note 15. Intangible assets The balance of capitalised intangible assets comprises: Cost In thousands of AUD Balance at 1 July 2016 Fully amortised & offset Internally developed Purchased Effects of foreign currency exchange Software development Third party software 32,546 (12,326) 8,588 ‑ ‑ 1,303 ‑ ‑ 80 (5) Balance at 30 June 2017 28,808 1,378 Consolidated Goodwill 3,289 ‑ ‑ ‑ (86) 3,203 Customer Relationship 800 ‑ ‑ ‑ (20) 780 Total 37,938 (12,326) 8,588 80 (111) 34,169 1,378 3,203 780 34,169 Balance at 1 July 2017 Fully amortised & offset Internally developed Purchased Effects of foreign currency exchange 28,808 ‑ 11,524 ‑ ‑ Balance at 30 June 2018 40,332 1,424 ‑ ‑ 38 8 ‑ ‑ ‑ 131 3,334 Consolidated ‑ ‑ ‑ 32 812 Amortisation In thousands of AUD Balance at 1 July 2016 Fully amortised & offset Amortisation for year Effects of foreign currency exchange Balance at 30 June 2017 Balance at 1 July 2017 Fully amortised & offset Amortisation for year Effects of foreign currency exchange Software development Third party software Goodwill Customer Relationship 14,730 (12,326) 10,301 ‑ 12,705 12,705 ‑ 9,448 ‑ 1,076 ‑ 147 (5) 1,218 1,218 ‑ 98 8 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160 ‑ 160 (8) 312 312 ‑ 155 20 ‑ 11,524 38 171 45,902 Total 15,966 (12,326) 10,608 (13) 14,235 14,235 ‑ 9,701 28 Balance at 30 June 2018 22,153 1,324 ‑ 487 23,964 Carrying amounts Consolidated In thousands of AUD Balance at 30 June 2017 Balance at 30 June 2018 Software development Third party software 16,103 18,179 160 100 Goodwill 3,203 3,334 Customer Relationship 468 325 Total 19,934 21,938 66 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 16. Goodwill Goodwill arose on the acquisition of IQ Services business in the year ending 30 June 2016. Management has identified the Group as the cash generating unit (the Prognosis CGU) to which goodwill is allocated for impairment testing. Management performs its annual impairment testing at least annually. The carrying value of goodwill at 30 June 2018 is $3,334,000 (2017: $3,203,000). A reconciliation of the movement in goodwill is included in note 15. The recoverable amount of the Prognosis CGU has been determined using a value in use approach. The value in use has been based on the following key assumptions: 1. Cash flow forecasts The cash flow forecasts are based upon a Board approved 2019 budget and management projections for the subsequent four years of the Prognosis CGU. 2. Discount rate Discount rate of 11% (2017: 11%) applied for value in use calculation is based on the post‑tax weighted average of capital cost applicable to the Prognosis CGU. 3. Terminal value The terminal growth rate after the five year projection period has been calculated using a growth rate of 3% (2017: 3%) which is determined by Management based on their assessment of expected long term annual growth for the software industry. The value in use does not indicate any impairment is required at 30 June 2018. Management believe that a reasonable change in any of the above key assumptions would not cause the carrying values to exceed their recoverable amounts. Note 17. Trade and other payables In thousands of AUD Trade and other creditors The average credit period on trade and other payables is 30 days. Note 18. Employee benefits In thousands of AUD Current Liability for annual leave Liability for long service leave Non‑current Liability for long service leave Pension plans Consolidated 2018 10,140 2017 9,620 Consolidated 2018 2017 2,143 942 3,085 1,765 842 2,607 242 316 Employees of the consolidated entity accumulate pension benefits through statutory contributions by the entities in the consolidated entity as required by the laws of the jurisdictions in which they operate, supplemented by individual contributions. 67 Integrated Research and its controlled entities Annual Report 2018 Note 18. Employee benefits (cont.) Share based payments Performance Rights On 21 November 2011, the consolidated entity established the Integrated Research Performance Rights and Options Plan (IRPROP). The plan enables the Company to offer performance rights to eligible employees to obtain shares in Integrated Research at no cost contingent upon performance conditions being met. The performance conditions include either a service period with performance components or a service period with a net after tax profit hurdle. The performance rights are automatically exercised into shares upon the performance conditions being met. The following performance rights were granted during the period: Grant Date Sep‑17 Oct‑17 Nov‑17 Number of Rights Earliest Vesting Date Expiry date 125,000 475,000 210,000 Aug 2020 Sep 2020 Aug 2018 Sep 2020 Oct 2020 Sep 2020 The fair value of the performance rights including assumptions used are as follows: Grant date Fair value at measurement date Share price Exercise price Expected volatility Contractual life (expressed in days) Expected dividends Risk‑free interest rate (based on 3 year treasury bonds) Model Used Sep 2017 Oct 2017 Nov 2017 $3.178 $3.38 nil 50% 1,125 1.7% 2.0% $3.217 $3.39 nil 50% 1,122 1.7% 2.0% $3.595 $3.77 Nil 50% 1,018 1.7% 2.0% Black‑Scholes Black‑Scholes Black‑Scholes The fair values of services received in return for performance rights granted to employees is measured by reference to the fair value of share options granted. During the year ended 30 June 2018, the consolidated entity recognised an expense through profit of $950,000 related to the fair value of performance rights (2017: $363,000). The following table provides the movement in performance rights during the year: In thousands of performance rights Outstanding at the beginning of the year Forfeited during the year Exercised during the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year (vested) 2018 1,801 (511) (1,100) 810 1,000 ‑ 2017 1,999 (848) (150) 800 1,801 ‑ 68 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 19. Deferred consideration for acquisition In thousands of AUD Non‑current Deferred consideration for acquisition Note 20. Provisions In thousands of AUD Current Employee benefits Non‑current Employee benefits Lease make good Note 21. Other liabilities In thousands of AUD Current Fair value of hedge liabilities ‑ forward foreign exchange contracts Non‑current Other creditors Note 4 Consolidated 2018 2017 ‑ ‑ 1,476 1,476 Consolidated Note 2018 2017 18 18 3,085 2,607 242 587 829 316 566 882 Consolidated 2018 2017 329 11 70 204 69 Integrated Research and its controlled entities Annual Report 2018 Note 22. Capital and reserves Share capital In thousands of shares On issue 1 July Issued against employee performance right exercised On issue 30 June Ordinary shares 2018 170,581 1,100 171,681 2017 170,431 150 170,581 The company does not have authorised capital or par value in respect of its issued shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the consolidated entity, as well as from the translation of liabilities that hedge the consolidated entity’s net investment in a foreign subsidiary. Employee benefit reserve The employee benefit reserve arises on the grant of either share options or performance rights to employees under the Integrated Research Performance Rights and Option Plan (established November 2011) or the Employee Share Option Plan (established October 2000). Refer to note 18 for further details. 70 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 22. Capital and reserves (cont.) Dividends Dividends recognised in the current year by the company are: In thousands of AUD Cents per share Total amount Franked/ unfranked Date of payment 2018 Final 2017 Interim 2018 Total amount 2017 Final 2016 Interim 2017 Total amount 3.5 3.0 3.5 3.0 5,987 100% franked 5,150 100% franked 26 Sep 17 10 Apr 18 11,137 5,970 60% franked 5,118 70% franked 13 Oct 16 19 Apr 17 11,088 After the end of the financial year, the following dividend was proposed by the directors. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2018 and will be recognised in subsequent financial statements: In thousands of AUD Final 2018 Cents per share 3.5 Total amount Franked/ unfranked 6,009 100% franked Date of payment 16 Oct 18 The final dividend declared of 3.5 cents together with the interim dividend paid in April 2018 of 3.0 cents takes total dividends for the 2018 financial year to 6.5 cents. Franking account disclosure: In thousands of AUD Adjusted franking account balance Impact on franking account balance of dividends not recognised Company 2018 7,260 (2,575) 2017 4,643 (2,566) 71 Integrated Research and its controlled entities Annual Report 2018 Note 23. Financial instruments Capital risk management The consolidated entity manages its capital to ensure that controlled entities will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of treasury management. The capital structure of the consolidated entity consists of cash and cash equivalents and equity attributable to equity holders of the company, comprising issued capital, reserves, and retained earnings as disclosed in Notes 10 and 23 respectively. Borrowing Facility The Company has available a $10 million multicurrency revolving cash advance facility that remains undrawn at 30 June 2018. The primary purpose of the facility is to fund working capital requirements. On 29 June 2018, the facility was extended for a further three and a half years (terminates 31 December 2021). The facility is secured by a General Security Agreement with a deed of cross guarantee including the parent entity, Integrated Research UK Limited, and Integrated Research Inc. The facility is also subject to certain debt covenants including a leverage ratio, interest cover ratio and capitalisation ratio. The Company met all the covenant requirements during the year. Interest is variable, linked to Bank Bill Swap Bid Rate (BBSY), plus a margin. Bank Guarantee Facility The Company has a $900,000 bank guarantee facility. The primary purpose of the facility is to provide bank guarantees to the Company’s landlord pursuant to contractual lease arrangements. At 30 June 2018, the total value of bank guarantees provided was $819,000. The facility terminates on 31 December 2019. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements. Financial risk management objectives The Board of Directors has overall responsibility for the establishment and oversight of the consolidated entity’s financial management framework. The Board has an established Audit and Risk Committee, which is responsible for developing and monitoring the consolidated entity’s financial management policies. The Committee provides regular reports to the Board of Directors on its activities. The Audit and Risk Committee oversees how Management monitors compliance with risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks. The main risks arising from the consolidated entity’s financial instruments are currency risk, credit risk, liquidity risk and cash flow interest rate risk. The consolidated entity seeks to minimise the effects of these risks, where deemed appropriate, by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the consolidated entity’s policies on foreign exchange risk, credit risk, the use of financial derivatives and non‑derivative financial instruments, and the investment of excess liquidity. The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and cash flow interest rate risks. The consolidated entity enters into foreign exchange forward contracts to hedge the exchange rate risk arising from transactions not recorded in an entity’s functional currency. 72 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 23. Financial instruments (cont.) Foreign currency risk management The consolidated entity undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amount of the consolidated entity’s foreign currency denominated monetary assets and monetary liabilities at the reporting date that are denominated in a currency that is different to the functional currency of the respective entities undertaking the transactions is as follows: In thousands of AUD US Dollar Euro Consolidated Liabilities Assets 2018 1,258 ‑ 2017 707 ‑ 2018 6,047 1,396 2017 4,345 1,249 Foreign currency sensitivity At 30 June 2018, if the US Dollar and Euro weakened or strengthened against the Australian dollar by the percentage shown, with all other variables held constant, net profit for the year would increase (decrease) by: In thousands of AUD US Dollar Impact Euro Impact Change in currency (i) ‑ 10% decrease US Dollar Impact Euro Impact Change in currency (i) ‑ 10% increase Consolidated Net profit Retained earnings 2018 532 155 (435) (127) 2017 404 139 (331) (114) 2018 532 155 (435) (127) 2017 404 139 (331) (114) (i) This has been based on the change in the exchange rate against the Australian dollar in the financial years ended 30 June 2018 and 30 June 2017. The sensitivity analysis has been based on the sensitivity rates used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates based on historical volatility. In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year end exposure does not necessarily reflect the exposure during the course of the year. The consolidated entity includes certain subsidiaries whose functional currencies are different to the consolidated entity presentation currency. The main operating entities outside of Australia are based in the United States, the United Kingdom, Germany and Singapore. As stated in the consolidated entity’s accounting policies per Note 1, on consolidation the assets and liabilities of these entities are translated into Australian dollars at exchange rates prevailing at the year end date. The income and expenses of these entities is translated at the average exchange rates for the year. Exchange differences arising are classified as equity and are transferred to a foreign exchange translation reserve. The consolidated entity’s future reported profits could therefore be impacted by changes in rates of exchange between the Australian Dollar and United States Dollar, UK Sterling, Euro and Singapore Dollar each. 73 Integrated Research and its controlled entities Annual Report 2018 Note 23. Financial instruments (cont.) Forward foreign exchange contracts The consolidated entity is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than the AUD. The currencies giving rise to this risk are primarily United States Dollar, UK Sterling and the Euro. The consolidated entity uses forward exchange contracts to hedge its foreign currency risk. The forward exchange contracts have maturities of less than two years after the year end date. The consolidated entity classifies its forward exchange contracts hedging forecasted transactions as cash flow hedges and measures them at fair value. The following table details the forward foreign currency contracts outstanding as at reporting date: Average Exchange Rate Foreign Currency Contract Value Fair Value Outstanding contracts 2018 2017 2018 FC’000 2017 FC’000 2018 A$’000 2017 A$’000 2018 A$’000 2017 A$’000 Consolidated Sell US Dollar Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months Sell Euros Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months Sell Sterling Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months 0.77 0.77 0.77 0.74 0.64 0.62 0.62 ‑ 0.58 0.57 0.56 ‑ 0.75 0.75 0.76 0.75 0.67 0.69 0.69 ‑ 0.57 0.61 0.60 0.58 2,800 2,000 1,250 1,250 1,850 3,623 2,454 450 1,150 750 2,619 1,629 1,687 596 1,515 995 (166) (86) (60) ‑ 150 50 100 ‑ 70 50 100 ‑ 100 50 50 ‑ 150 50 50 50 235 81 161 ‑ 120 87 180 ‑ 150 73 73 ‑ 263 82 83 86 (3) 1 1 ‑ (5) (3) 1 ‑ (320) 46 10 15 15 1 (2) (3) ‑ 10 (3) (3) 1 87 These hedge assets and liabilities are classified as a level 2 fair value measurement, being derived from inputs provided from financial institutions, rather than quoted prices that are observable for the asset either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value measurement of the over the counter forward contact would not qualify as Level 1 as there is not a quoted price for the actual contract, even though data used to value the contract may be derived entirely from active foreign‑exchange and interest‑rate market. 74 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 23. Financial instruments (cont.) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. The largest single counterparty balance with any one customer at 30 June 2018 was $4.5 million (2017: $3.9 million). Ongoing credit evaluation is performed on the financial condition of accounts. The Company continued its program to sell selected account receivable balances to a third party without recourse. The purpose of the program is to manage credit risk and improve working capital. During the year ended 30 June 2018 a total of $14.4 million (2017: $8.0 million) debtors were sold at a cost of $738,000 (2017: $676,000). The Company continues to bear maintenance support obligations to the end customers which are carried as a liability in the deferred revenue account of the Company’s balance sheet of $3.0 million (2017: $0.8 million). The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit‑rating agencies. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the board of directors, who have built an appropriate liquidity risk management framework for the management of the consolidated entity’s short, medium and long‑term funding and liquidity management requirements. The consolidated entity manages liquidity risk by maintaining adequate reserves, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. All creditor and other payables shown in Note 17 and Note 21 for both 2018 and 2017 carry no interest obligation. Fair value of financial instruments The carrying value of financial assets and financial liabilities of the consolidated entity is a reasonable approximation of their fair value. For non‑current trade debtors Integrated Research has considered a discount rate to recognise the net present value of the debtors. Level 3 inputs have been considered including corporate borrowing rates, size of the customer and jurisdiction of the customer. A discounted cashflow model was used to derive the fair value. The range of discount rates was between 3.5% to 5.5%. The carrying value of non‑current trade debtors for 2018 of the consolidated entity was a reasonable approximation of their fair value. Note 24. Operating leases Non‑cancellable operating lease rentals is for office space with payables as follows: In thousands of AUD Less than one year Between one and five years Greater than five years Consolidated 2018 2,001 1,674 ‑ 3,675 2017 1,938 3,275 ‑ 5,213 75 Integrated Research and its controlled entities Annual Report 2018 Note 25. Consolidated entities Parent entity: Integrated Research Limited Subsidiaries of Integrated Research Limited: Integrated Research Inc Integrated Research Singapore Pte Limited Integrated Research UK Limited Subsidiaries of Integrated Research UK Limited: Ownership interest Country of incorporation 2018 2017 Australia USA Singapore UK 100% 100% 100% 100% 100% 100% Integrated Research Germany GmbH Germany 100% 100% Note 26. Reconciliation of cash flows from operating activities In thousands of AUD Profit for the year Depreciation and amortisation Provision for doubtful debts Interest received Interest paid Share‑based payments expense Net exchange differences Change in operating assets and liabilities: (Increase)/decrease in trade debtors (Increase)/decrease in future income tax benefit (Increase)/decrease in other operating assets Increase/(decrease) in trade and other payables Increase/(decrease) in other operating liabilities Increase/(decrease) in provision for income taxes payable Increase/(decrease) in provision for deferred income taxes Increase/(decrease) in other provisions Net cash from operating activities Consolidated 2018 19,180 10,582 (108) (518) 95 950 883 2017 18,520 11,299 (406) (289) 116 363 18 (11,889) (6,501) 579 (16) 520 2,234 (2,316) 841 425 345 (569) 546 2,238 1,068 (476) (110) 21,442 26,162 76 Integrated Research and its controlled entities Annual Report 2018Financial Statements Note 27. Key management personnel disclosures Key management personnel compensation The key management personnel compensation are as follows: In AUD Short‑term benefits Post‑employment benefits Long term benefit Equity compensation benefits Consolidated 2018 2017 3,400,669 3,780,356 27,992 150,592 460,409 24,658 184,016 150,046 4,039,662 4,139,076 Apart from the details disclosed in this note, no director has entered into a material contract with the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year‑end. Note 28. Related parties At 30 June 2018 Mr Steve Killelea, the Chairman of the Company, owned either directly or indirectly 39.72% of the Company (2017: 52.67%). Note 29. Parent entity disclosures In thousands of AUD Financial Position Assets Current assets Non‑current assets Total Assets Liabilities Current Liabilities Non‑current liabilities Total Liabilities Net Assets Equity Issued Capital Employee benefits Reserve Hedging reserve Retained Earnings Total Equity Parent Entity 2018 2017 40,730 20,553 61,283 9,505 5,845 15,350 45,933 1,667 3,445 (146) 40,967 45,933 37,197 16,475 53,672 10,830 4,116 14,946 38,726 1,667 2,492 30 34,537 38,726 77 Integrated Research and its controlled entities Annual Report 2018 Note 29. Parent entity disclosures (cont.) In thousands of AUD Financial Performance Profit for the year Other comprehensive income Total comprehensive income Investments in subsidiaries are included at cost. Note 30. Subsequent events Dividends Parent Entity 2018 2017 17,660 (176) 17,484 16,857 (20) 16,837 For dividends declared after 30 June 2018 see Note 22 in the financial statements. The financial effect of dividends declared and paid after 30 June 2018 have not been brought to account in the financial statements for the year ended 30 June 2018 and will be recognised in subsequent financial reports. 78 Integrated Research and its controlled entities Annual Report 2018Financial Statements Directors’ declaration Directors’ declaration In accordance with a resolution of the directors of Integrated Research Limited, we state that: 1. In the opinion of the directors: (a) the financial statements and notes of Integrated Research Limited for the financial year ended 30 June 2018 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 1; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the directors by the chief executive officer and chief financial officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. This declaration is made in accordance with a resolution of the Directors. Steve Killelea Chairman John Merakovsky Chief Executive Officer North Sydney, 16 August 2018 North Sydney, 16 August 2018 79 Integrated Research and its controlled entities Annual Report 2018 80 Integrated Research and its controlled entities Annual Report 2018 81 Integrated Research and its controlled entities Annual Report 2018 82 Integrated Research and its controlled entities Annual Report 2018 83 Integrated Research and its controlled entities Annual Report 2018 84 Integrated Research and its controlled entities Annual Report 2018 27 to 35 85 Integrated Research and its controlled entities Annual Report 2018 86 Integrated Research and its controlled entities Annual Report 2018 ASX additional information Shareholder information Analysis of numbers of equity security holders by size of holding as at September 2018 1 ‑1,000 1,001 ‑ 5,000 5,001 ‑ 10,000 10,001 ‑ 100,000 100,001 and over Fully Paid Ordinary Shares (Total) As of 11 September 2018 Rank Name 1. 2. 3. 4. MR STEPHEN JOHN KILLELEA J P MORGAN NOMINEES AUSTRALIA LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CITICORP NOMINEES PTY LIMITED 5. MR ANDREW RHYS RUTHERFORD 6. 7. 8. 9. BNP PARIBAS NOMINEES PTY LTDECAPITAL NOMINEES PTY LIMITED CS FOURTH NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD 10. CUSTODIAL SERVICES LIMITED 11. 12. BRISPOT NOMINEES PTY LTD UBS NOMINEES PTY LTD Class of equity security Ordinary shares Shares Options Performance Rights 1,571 3,473 1,468 1,359 71 7,942 ‑ ‑ ‑ ‑ ‑ ‑ ‑ 22 39 8 2 71 Units % of Units 67,855,619 39.50 11,718,810 7,092,648 6,886,017 3,074,210 2,765,823 1,009,368 812,016 721,016 672,786 650,163 575,512 13. MR GARY RONALD POOLE + MRS LEIGH MARGARET POOLE 571,085 14. MR ROBIN RAVENSCROFT BARTTELOT 15. BNP PARIBAS NOMINEES PTY LTD 520,000 51 6 , 6 01 16. MR GARY RONALD POOLE + MRS LEIGH MARGARET POOLE 470,583 17. 18. 19. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED ‑ A/C 2 FORSYTH BARR CUSTODIANS LTD NATIONAL NOMINEES LIMITED 20. FERGFAM NOMINEES PTY LTD 447,207 401,105 378,963 375,263 6.82 4.13 4.01 1.79 1.61 0.59 0.47 0.42 0.39 0.38 0.34 0.33 0.30 0.30 0.27 0.26 0.23 0.22 0.22 87 Integrated Research and its controlled entities Annual Report 2018 ASX additional information Unquoted equity securities Option issued under the Integrated Research Limited Employee Option Plan to take up ordinary shares ‑* Performance Rights issued under the Integrated Research Limited Performance Rights and Option Plan to take up ordinary shares 870,000** ‑ 71 Number on issue Number of holders * Number of unissued ordinary shares under the Options. ** Number of unissued ordinary shares under the Performance Rights. On‑market buy‑back There is no current on‑market buy‑back. Substantial holders Substantial holders in the Company are set below: Stephen John Killelea* * Include direct and indirect holdings at 11 September 2018. Number held Percentage 68,193,231 39.70 Voting rights The voting rights attaching to each class of equity securities are set out below: 1. Ordinary shares. On a show of hands every member present at a meeting in person or proxy shall have one vote and upon a poll each share have one vote. 2. Options. No voting rights. 3. Performance rights. 4. No voting rights. Other information Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed Company limited by shares. 88 Integrated Research and its controlled entities Annual Report 2018 Creating clarity and Creating clarity and insight in a world of insight in a world of connected devices. connected devices. Corporate Corporate directory directory Directors Directors Steve Killelea Non‑Executive Director & Chairman Steve Killelea Non‑Executive Director & Chairman John Merakovsky Managing Director and Chief Executive Offi cer John Merakovsky Managing Director and Chief Executive Offi cer Nick Abrahams Nick Abrahams Non‑Executive Director Non‑Executive Director Share Registry Computershare Share Registry Computershare Solicitors Ashurst Level 11, 5 Martin Place Sydney NSW 2000 Solicitors Ashurst Level 11, 5 Martin Place Sydney NSW 2000 Bankers National Australia Bank Westpac Banking Corporation Bankers National Australia Bank Westpac Banking Corporation Paul Brandling Independent Non‑Executive Director and Deputy Chairman Paul Brandling Independent Non‑Executive Director and Deputy Chairman Securities Exchange Listing Australian Securities Exchange Code: IRI Securities Exchange Listing Australian Securities Exchange Code: IRI Garry Dinnie Independent Non‑Executive Director Garry Dinnie Independent Non‑Executive Director Peter Lloyd Peter Lloyd Non‑Executive Director Non‑Executive Director Anne Myers Independent Non‑Executive Director Anne Myers Independent Non‑Executive Director Company Secretary David Purdue Company Secretary David Purdue Registered Offi ce Registered Offi ce Level 9, 100 Pacifi c Highway Level 9, 100 Pacifi c Highway North Sydney NSW 2060 North Sydney NSW 2060 T. +61 (2) 9966 1066 T. +61 (2) 9966 1066 Country of Incorporation Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Country of Incorporation Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Notice of Annual General Meeting Notice of Annual General Meeting The Annual General Meeting of The Annual General Meeting of Integrated Research Limited will be Integrated Research Limited will be held on: held on: Thursday 15 November 2018 Thursday 15 November 2018 Museum of Sydney Museum of Sydney Cnr. Phillip & Bridge Streets, Sydney Cnr. Phillip & Bridge Streets, Sydney at 3:00pm at 3:00pm This Annual Report is printed on Impress DM Matt. Impress DM is a FSC Certifi ed paper which is made from elemental This Annual Report is printed on Impress DM Matt. Impress DM is a FSC Certifi ed paper which is made from elemental chlorine free pulp derived from well‑managed forests. It is manufactured by an EMAS and ISO 14001 certifi ed mill. chlorine free pulp derived from well‑managed forests. It is manufactured by an EMAS and ISO 14001 certifi ed mill. 4914 Designed and Produced by RDA Creative www.rda.com.au 4914 Designed and Produced by RDA Creative www.rda.com.au I n t e g r a t e d R e s e a r c h A n n u a l R e p o r t 2 0 1 8 Asia Pacifi c/Middle East/Africa Integrated Research Limited Level 9, 100 Pacifi c Highway North Sydney NSW 2060 Australia T. +61 (2) 9966 1066 E. info.ap@ir.com United Kingdom & Ireland Integrated Research UK Ltd The Atrium, Harefi eld Road Uxbridge, Middlesex UB8 1PH United Kingdom T. +44 (0) 189 581 7800 E. info.europe@ir.com Americas ‑ West Coast Integrated Research, Inc. 6312 S. Fiddlers Green Circle, Suite 500N Denver, CO 80111, USA T: +1 (303) 390 8700 F: +1 (303) 390 877 E. info.usa@ir.com Singapore Integrated Research (Singapore) Pte. Ltd. Unit 14‑03, Palais Renaissance 390 Orchard Road Singapore 238871 T. +65 6684 5856 E. info.ap@ir.com Germany Integrated Research Germany GmbH Hamborner Str. 53 40472 Düsseldorf, Germany T. +49 (89) 97 007 132 E. info.germany@ir.com Americas ‑ East Coast Integrated Research, Inc. 12950 Worldgate Dr, Suite 720 Herndon, VA 20170, USA T: +1 (303) 390 8700 F: +1 (303) 390 8777 E. info.usa@ir.com ir.com Americas ‑ Mid West Integrated Research, Inc. 6601 Lyndale Ave. S., Suite 330 Richfi eld, Minnesota, MN 55423, USA T. +1 (612) 243 6700 F. +1 (303) 390 8777 E. info.usa@ir.com Integrated Research Annual Report 2018 ABN 76 003 588 449